Enhancing Competences for Competitive Advantage (Advances in Applied Business Strategy)

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ENHANCING COMPETENCES FOR COMPETITIVE ADVANTAGE

ADVANCES IN APPLIED BUSINESS STRATEGY Series Editors: Ron Sanchez and Aime´ Heene Recent Volumes: Volume 5:

Turnaround Research: Past Accomplishments and Future Challenges Series Editor: Lawrence W Foster Volume Editor: David Ketchen

Volume 6:

(a) Theory Development of Competence-based Management (b) Research in Competence-based Management (c) Formulating and Implementing Competencebased Strategies Volume Editors: Ron Sanchez and Aime´ Heene Competence Perspectives on Managing Internal Processes Volume Editors: Ron Sanchez and Aime´ Heene Competence Perspectives on Managing Interﬁrm Interactions Volume Editors: Ron Sanchez and Aime´ Heene

Volume 7:

Volume 8:

Volume 9:

Competence Perspectives on Resources, Stakeholders and Renewal Volume Editors: Ron Sanchez and Aime´ Heene Volume 10: Competence Perspectives on Learning and Dynamic Capabilities Volume Editors: Aime´ Heene, Rudy Martens, and Ron Sanchez Volume 11: Competence-Building and Leveraging in Interorganizational Relations Volume Editors: Rudy Martens, Aime´ Heene, and Ron Sanchez

ADVANCES IN APPLIED BUSINESS STRATEGY VOLUME 12

ENHANCING COMPETENCES FOR COMPETITIVE ADVANTAGE EDITED BY

RON SANCHEZ Copenhagen Business School, Denmark and National University of Singapore, Singapore

AIME´ HEENE Ghent University, Belgium and University Antwerp Management School, Belgium

United Kingdom – North America – Japan India – Malaysia – China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2010 Copyright r 2010 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-84855-876-2 ISSN: 0749-6826 (Series)

Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print

CONTENTS LIST OF CONTRIBUTORS

vii

INTRODUCTION

ix

LOBBYING: STRATEGIES TO MAKE A FIRM’S COMPETENCES GENERATE VALUE Martin Gersch, Christian Goeke and Jo¨rg Freiling COMPETENCE-BASED STRATEGIES OF SERVICE TRANSITION Tim Kessler and Michael Stephan ENHANCING THE INFLOW OF KNOWLEDGE: ELABORATING THE ABSORPTIVE CAPACITY CYCLE IN SMES Roberto Filippini, Wolfgang H. Gu¨ttel and Anna Nosella TOYOTA’S COMPETITIVE ADVANTAGE: PATH DEPENDENCY, DYNAMIC CAPABILITIES, AND SOURCES OF INIMITABILITY – A CONTRASTIVE STUDY WITH NISSAN Evelyn Anderson TOWARD THE THEORY OF TEMPORARY COMPETITIVE ADVANTAGE IN INTERNATIONALIZATION Petri Ahokangas, Anita Juho and Lauri Haapanen v

1

23

63

87

121

vi

CONTENTS

RELATIONAL QUALITY, ALLIANCE CAPABILITY, AND ALLIANCE PERFORMANCE: AN INTEGRATED FRAMEWORK Koen H. Heimeriks and Melanie Schreiner

145

HOW TO BUILD ALLIANCE CAPABILITY: A LIFE CYCLE APPROACH Kim Sluyts, Rudy Martens and Paul Matthyssens

173

MODELING ENTREPRENEURIAL ACTION CHOICE: FROM INTENT THROUGH RHETORIC TO ACTION Janice A. Black, Richard L. Oliver and Lori D. Paris SELF-ORGANIZATION OF COMPETENCY DEVELOPMENT AND THE ROLE OF MANAGERS Martin Kro¨ll

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LIST OF CONTRIBUTORS Petri Ahokangas

Department of International Business, Faculty of Economics and Business Administration, University of Oulu, Oulu, Finland

Evelyn Anderson

School of Arts & Sciences, Australian Catholic University, Brisbane, Australia

Janice A. Black

Department of Management and Marketing, School of Business and Public Administration, California State University, Bakersﬁeld, USA

Roberto Filippini

Institute of Management and Engineering, University of Padua, Vicenza, Italy

Jo¨rg Freiling

LEMEX – Chair for Small Business and Entrepreneurship, University of Bremen, Bremen, Germany

Martin Gersch

School of Business & Economics, Freie Universita¨t Berlin, Berlin, Germany

Christian Goeke

School of Business & Economics, Freie Universita¨t Berlin, Berlin, Germany

Wolfgang H. Gu¨ttel

Institute of Human Resource and Change Management, Johannes Kepler University, Linz, Austria

Lauri Haapanen

Department of International Business, Faculty of Economics and Business Administration, University of Oulu, Oulu, Finland

Koen H. Heimeriks

Rotterdam School of Management, Erasmus University, Rotterdam, Netherlands vii

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LIST OF CONTRIBUTORS

Anita Juho

Department of Marketing, Faculty of Economics and Business Administration, University of Oulu, Oulu, Finland

Tim Kessler

Department of Technology and Innovation Management, Faculty of Business Administration and Economics, Philipps-University Marburg, Marburg, Germany

Martin Kro¨ll

Institute of Applied Work Science, Ruhr University of Bochum, Bochum, Germany

Rudy Martens

Department of Management, University of Antwerp, Antwerp, Belgium

Paul Matthyssens

Department of Management, University of Antwerp, Antwerp, Belgium

Anna Nosella

Department of Industrial Engineering, University of Padua, Vicenza, Italy

Richard L. Oliver

Department of Accounting and Information Systems, College of Business, New Mexico State University, Las Cruces, USA

Lori D. Paris

Department of Management and Marketing, School of Business and Public Administration, California State University, Bakersﬁeld, USA

Melanie Schreiner

Department for Politics and Management, University of Konstanz, Konstanz, Germany

Kim Sluyts

Department of Management, University of Antwerp, Antwerp, Belgium

Michael Stephan

Department of Technology and Innovation Management, Faculty of Business Administration and Economics, Philipps-University Marburg, Marburg, Germany

INTRODUCTION This volume of Advances in Applied Business Strategy (AABS) presents a collection of studies exploring different ways in which an organization’s competences can be enhanced to create competitive advantage that is enduring or intendedly transitional. In their study ‘‘Lobbying: Strategies to make a ﬁrm’s competences generate value,’’ Martin Gersch, Christian Goeke, and Jo¨rg Freiling look beyond lobbying’s usual political domain to assess the ways in which lobbying may help ﬁrms extract greater value from their current or contemplated competences. By lobbying for laws and regulation favorable to a particular set of competences or competence trajectories, ﬁrms may be able to inﬂuence the business environment in ways that extend the viable lifetime of current competences or assist the building of new competences. The authors develop and validate several propositions related to the predicted effects of lobbying in the context of the German Health Care industry. ‘‘Competence-based strategies of service transition’’ by Tim Kessler and Michael Stephan examines the potential for manufacturing organizations to grow through expansion of their service offerings. Arguing that strategies focused on cost reduction are unlikely to enable manufacturing ﬁrms to achieve a sustainable competitive advantage today, the authors propose that manufacturing ﬁrms instead focus on expanding their service activities as the path to sustainable success. They also assess the challenge of building new competences that such a strategic shift will represent for most manufacturing ﬁrms. In their paper ‘‘Enhancing the in-ﬂow of knowledge: Elaborating the absorptive capacity-cycle in SMEs,’’ Roberto Filippini, Wolfgang H. Gu¨ttel, and Anna Nosella address the possibilities for small and medium enterprises (SMEs) to increase the knowledge ﬂows they enjoy across the boundaries of the ﬁrm. They explore the potential of knowledge management projects to stimulate the search for and implementation of new knowledge ﬂows from ﬁrm-addressable resources in the environment of a ﬁrm. They argue for the adoption of explicit knowledge management routines for absorbing knowledge during projects, rather than relying on haphazard knowledge absorption. ix

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In her study ‘‘Path dependency, dynamic capabilities and sources of inimitability in competitive advantage: A comparative study of Toyota and Nissan,’’ Evelyn Anderson undertakes a historical analysis of the differential impacts of Japanese postwar industrial policy on Toyota and Nissan. Anderson suggests that important differences in the resource and competence bases of the two ﬁrms after the Second World war resulted in different strategic logics and governance structures being adopted by the two ﬁrms – and as a result the two ﬁrms responded differently to government policy initiatives. Observing that signiﬁcant performance differences between the two ﬁrms did not emerge until the 1960s, the author suggests that the governance structure and management processes adopted by Toyota resulted in signiﬁcant causal ambiguity that prevented Nissan from emulating Toyota’s trajectory of postwar success. Taking a track less followed, Petri Ahokangas, Anita Juho, and Lauri Haapanen analyze the potential importance of temporary forms of competitive advantage when ﬁrms undertake growth through internationalization. Their paper ‘‘Toward the theory of temporary competitive advantage in internationalization’’ suggests that internationalizing ﬁrms may go through several evolutionary stages, during which a convergence of managerial selection, market dynamism, and resource evolution will select the resources and competences that will become longer-term, sustainable sources of competitive advantage. Koen H. Heimeriks and Melanie Schreiner’s paper ‘‘Relational quality, alliance capability, and alliance performance: An integrated framework’’ examines the role of a ﬁrm’s alliance capability and its ability to maintain good relationships with alliance partners affect a ﬁrm’s dyadic alliances. The authors also suggest ﬁrm-level mechanisms that can be used to improve the quality of a ﬁrm’s dyadic alliances. A second paper on alliances, ‘‘How to build alliance capability: A life cycle approach’’ by Kim Sluyts, Rudy Martens, and Paul Matthyssens, surveys the concept of alliance capability as developed in the competence literature. The concept of alliance capability is analyzed and argued to consist of ﬁve subcapabilities, each of which is related to a speciﬁc stage in the life cycle of an alliance. The authors also suggest a number of structural, technological, and human-related tools and techniques for improving relevant subcapabilities at each stage of the alliance life cycle. Focusing on the key process of entrepreneurial action undertaken by managers in ﬁrms, the paper ‘‘Modeling entrepreneurial action choice: From intent through rhetoric to action’’ by Janice A. Black, Richard L. Oliver, and Lori D. Paris develop an agent-based model to evaluate how

Introduction

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environmental factors, organizational inertia, entrepreneurial cognitive traits, learning potential, and opportunity identiﬁcation inﬂuence entrepreneurial action choices. The authors evaluate the likelihood of entrepreneurial action taking under various combinations of these factors. In his paper ‘‘Self-organization of competence development and the role of managers,’’ Martin Kro¨ll examines the role of individual competency development as a condition for building and maintaining organizational competences. He investigates different conditions deemed necessary for successful self-organization of competency development in large versus small and medium enterprises, as well as the potential for combining selfmanaged and externally provided competency development initiatives. Ron Sanchez Aime´ Heene Editors

LOBBYING: STRATEGIES TO MAKE A FIRM’S COMPETENCES GENERATE VALUE Martin Gersch, Christian Goeke and Jo¨rg Freiling ABSTRACT Extant work on lobbying primarily focuses on who is lobbying and is lobbied as well as strategies of how to exert inﬂuence. More fundamentally, we address (1) what drives ﬁrms to engage in lobbying activities at all and (2) what factors determine the alignment of corporate lobbying. More concrete, we investigate why and also how ﬁrms do lobbying. Another intention is to further anchor this highly relevant instrument of business practice in the scientiﬁc discourse of strategic management. It turns out that the dynamic, systemic, cognitive, and holistic rationale of the competence perspective is a very strong contributor of fresh thoughts to the debate on lobbying as a strategic means. We adopt this perspective by speciﬁcally making use of the Competence-based Theory of the Firm (CbTF) in order to scrutinize this issue in theoretical terms. Especially path-dependent developments when building and leveraging a ﬁrm’s resources and competences as well as resource/competence speciﬁcity cause organizational inertia and limited adaptability to Enhancing Competences for Competitive Advantage Advances in Applied Business Strategy, Volume 12, 1–22 Copyright r 2010 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1108/S0749-6826(2010)0000012004

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changing environmental conditions. Instead of passively adapting to changing environmental conditions, lobbying activities directly aim at entrepreneurial and goal-oriented attempts to exert inﬂuence and to steer changes in the relevant business environment, basic conditions underlying every market process, or institutional migration paths at points of inﬂection. Acknowledging their discretionary potential to act, agents seek to achieve a strategic ﬁt between market requirements and the output they are able to render based on their competences by using the lever of manipulating their environment. Empirically, propositions are derived and validated with an integrated set of qualitative empirical methods applied in the German healthcare system between 2004 and 2008.

INTRODUCTION It is undisputed that a ﬁrm’s competitiveness and competitive advantages do not only rely on mastering transaction-related market processes alone, but on ‘‘nonmarket phenomena’’ in the context of the actual markets, as well. Economic activity is embedded in and funneled by its institutional environment. This institutional environment is made up of industry regulation, governmental agencies, law, decisions of courts, technical norms and standards, just to mention some facets (Dahan, 2005). In varying degree, codiﬁed restrictions apply in every industry and not only in highly regulated ones like utility, telecommunication, or healthcare. Regulating intervention can take many different forms and might affect a variety of ﬁrm, industry, or market parameters, while particular ﬁrms typically consider some scenarios of industry parameters more favorable than others. Moreover, a certain scenario may represent a threat to one ﬁrm but can constitute an opportunity for another. The less similar ﬁrms are in an industry, the stronger the idiosyncratic effects of an exogenous threat (Sadrieh & Annavarjula, 2005). In particular those parameters, which are man-made and codiﬁed, are typically ﬁxed by a delimited number of decision makers (e.g., politicians and standard setters) who decide about cornerstones of future business environments in particular industry sectors. Theory of regulation and political economy is clear about the fact that those decisions are always made with incomplete information and under uncertainty. On a general level, an economic approach to political behavior assumes that actual political choices are determined by the efforts of individuals and groups to

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further their own interests (Becker, 1983). Models applied in theory then typically consist of government decision makers, ﬁrms, and – sometimes – special interest groups (Lyon & Maxwell, 2004). Firms’ public affairs strategies are applied in order to inﬂuence parameters of the relevant business environment. These strategies are useful to create and/or maintain the ﬁrms’ sources of competitive advantages or to erode or destroy the sources of competitive advantages of competitors. One way of doing so is ‘‘lobbying’’ as any attempt by agents or interest groups to inﬂuence the decisions of decision makers in a goal-oriented and beneﬁcial way (Encyclopaedia-Britannica, 2007), which must not necessarily be limited to aim at government authorities. It is argued that a ﬁrm’s use of political strategies such as lobbying is an underplayed topic in strategic management theory (Schuler, 1996; Jacobides, Knudsen, & Augier, 2006). Apart from rent-seeking behavior, i.e., opportunistic seeking for government-given advantages without a compensation (Tullock, 1967), lobbying can easily be traced back to a simple assumption: there are some scenarios in the relevant business environment that are more favorable for a ﬁrm and there are others where it is not so. An emphasis in the motivations for lobbying must therefore be looked for in the idiosyncratic potentials inherent in a ﬁrm, which coincides with the perspective of the resource-based and competence-based view of the ﬁrm (Sanchez & Heene, 2004; Barney, 2001; Freiling, Gersch, & Goeke, 2008). This is why we consider this stream of strategic management theory as a fertile anchor point to integrate ‘‘lobbying’’ into the theory-based strategic management toolkit. As a very ﬁrst step, this paper addresses the research question of what drives ﬁrms to engage in lobbying activities from the dynamic, systemic, cognitive, and holistic angle of competence-based management (Sanchez & Heene, 2004) and especially a Competence-based Theory of the Firm (CbTF) (Freiling et al., 2008). Additionally, we try to get ﬁrst insights of how the ﬁrms do lobbying from a competence-based perspective and what mechanisms they assume to work in order to conduct effective lobbying. For this purpose, ﬁrst the research gap in the intersection of extant literature on lobbying and resource-based/competence-based theory is clariﬁed. With the help of an interactive qualitative research framework, the research question is explored within the German healthcare sector. Validated results are formulated in ﬁrst propositions. Due to the interactive nature of the research design, it turns out that the constructs to explain the common base of lobbying activities are very close to the explanation of the foundation of special interest groups.

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THEORY There is a huge body of research and analyses on lobbying in social sciences – with a strong emphasis on the economic perspective. Extant work primarily focuses on the lobbying process comprising who is lobbying and who is lobbied, how to get access to decision makers, strategies of exerting inﬂuence and information transmission, or organizational forms of lobbying (Dahan, 2005; de Figueiredo & Silverman, 2006). The common bases for lobbying activities are only treated quite superﬁcially: without further detailing, it is typically argued that due to some organizational inertia, ﬁrms are not able to react on or to master all environmental conditions with the same result. Additionally, a set of environmental conditions that is favorable to one ﬁrm does not need to be equally beneﬁcial to another. Thus, expecting differential consequences, ﬁrms are more likely to have diverging and/or conﬂicting interests that they might want to enforce by political action. Oftentimes it is argued that, for these purposes, ﬁrms may join forces to form subgroups in an industry, each coalition adopting a differentiated position (Sadrieh & Annavarjula, 2005). As already stated above, a main reason for lobbying seems to lie in ﬁrm heterogeneity and idiosyncrasy combined with a limited adaptability to new or changing environmental conditions. Competent ﬁrms in one area simply face ﬁerce restrictions on resource and competence gaps in other areas that they cannot overcome quickly, thereby leading to dependency on external resources (Pfeffer & Salancik, 1978; Freiling, 2008). Although these issues are not fundamentally connected in research, they are vital cornerstones of the resource and competence perspective in strategic management. This stream of research puts an emphasis on ﬁrm heterogeneity and unique organizational potentials. It refers to ﬁrms as distinct bundles of resources and competences (Penrose, 1959) that have evolved over time and are embedded in their relevant business environment. Within an organization, homogeneous assets, which can typically be procured in markets, are subject to a ﬁrm-speciﬁc upgrading process in order to develop ‘‘resources’’ (Barney, Wright, & Ketchen, 2001; Sanchez & Heene, 2004). This process is primarily made of (re-)bundling and/or learning processes. Permanently required upgrades ﬁnally contribute to the actual and future competitiveness of the ﬁrm. Furthermore, competences comprise the repeatable ability to render competitive output with these resources, based on knowledge and usually nonrandomly managed by rules and channeled by routines (Becker, 1983). They enable goal-oriented processes to arrange future readiness for

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action and the potentials to render concrete input to the market. Competences cater to a conservation of competitiveness and, if so, even competitive advantages (Freiling et al., 2008). However, such upgrading processes follow idiosyncratic paths, are uncertain, and take time. Moreover, an existing resource and competence endowment of a ﬁrm can also lead to organizational inertia concerning the adaptation to external changes (Leonard-Barton, 1992). Boddewyn and Brewer (1994) identify the potential to connect the resourcebased/competence-based view with the subject area of lobbying. They ﬁnd it ‘‘strange’’ that there is ‘‘relative silence of the now popular resource-based theory of strategic advantages’’ about ‘‘nonmarket phenomena’’ such as lobbying, and that means of this theory acquired and used to gain rents are purely ‘‘intraeconomic.’’ In particular, Boddewyn and Brewer point out the neglected so-called ‘‘political resources.’’ Meanwhile, there is some literature using the term ‘‘political resource’’ (Frynas, Mellahi, & Pigman, 2006). In this sense, lobbying is understood as an effort to build such political resources (Sadrieh & Annavarjula, 2005), as for example access to and credibility with decision makers. However, typically the interpretation of the term ‘‘resource’’ does not meet the above-outlined meaning that is typical for resource and competence theory (Dahan, 2005). For consistently analyzing the interplay of ﬁrm potentials with the evolution of the market and/or the industry environment, it is necessary to complement the resource and competence perspective with a market theory, as well. This is deemed essential to understand the role of nonmarket phenomena in the course of organization/environment coevolution as well. While the idea has existed for a long time that the competence perspective can very well be integrated into the process-oriented framework of the Austrian School, especially some very recent research emphasizes the compatibility of the resource-based and competence-based views with the Austrian School market process theory, even in terms of philosophy of science (Freiling et al., 2008; Foss & Ishikawa, 2007). These works even claim that the resource-based and competence-based views have the potential to ﬁll the ‘‘missing chapter’’ of a theory of the ﬁrm in the Austrian School. This is why we subsequently will be referring to a ‘‘Competence-based Theory of the Firm.’’ In a nutshell, the Austrian School considers entrepreneurship and agents’ alertness as driving forces for economic development and changes, founding their school of thoughts on the core basic assumptions of (1) methodological individualism, (2) subjectivism, (3) relevance of time, (4) radical uncertainty,

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(5) ‘‘acting man’’ as the model of man, and (6) non-consummatory approach combined with moderate voluntarism (Vaughn, 1994; Freiling et al., 2008). The agents’ knowledge is incomplete and asymmetrically distributed. Economic agents gain new knowledge through every market process. To be precise, while traditional competence theory has its focus on ‘‘market input processes,’’ these have to be distinguished from ‘‘market processes,’’ which at least comprise the collection and diffusion of knowledge about offered or desired bundles of goods, services, and property rights (as the category ‘‘object of market’’) and negotiations that precede the exchange of these bundles and agreements on the transfer of property rights, but also the actual transaction (Gersch & Goeke, 2007). Market processes take place embedded into existing market rules, i.e., the ‘‘constitution’’ of markets, which contains ‘‘codes of conduct’’ and legal norms for the sell-side as well as for the buy-side. Market processes themselves can be arranged according to the market structure (e.g., the number and size of competitors and potential customers). Particular features of the market structure are – from an evolutionary point of view – not only results of players’ action but also factors that inﬂuence their future conduct (and therefore market processes). In this sense, even ‘‘small events’’ in the market process can be meaningful. On the basis of new knowledge accessed, they build new expectations and revise their plans as well as market offerings, always seeking to enhance the competitiveness, creatively destroying old ideas or concepts (Schumpeter, 1934) and using competition as a discovery process (Hayek, 1978). According to market process theory’s basic rationale, entrepreneurial action is viewed as the primum mobile of any kind of change process. There are unforeseeable points of inﬂection (Sanchez, 1997) and windows of opportunity continuously opening during the market process for alert and entrepreneurial ﬁrms to create new alternatives to future market offerings (Christensen, Sua´rez, & Utterback, 1998). The so-called ‘‘triggers’’ for change, which are often highlighted in literature (Porter & Rivkin, 2000) – and, if of a regulative nature, can surely be induced by lobbing – thereby work as ‘‘window openers’’ and ‘‘window controllers’’ on basically endless, irreversible, and idiosyncratic paths. These paths are formed accidentally to a large extent and as a sequence of decisions (which sometimes also restrict decisions-to-come) and events. Together, CbTF and the Austrian School form the theoretical framework for the analysis of common bases for lobbying activities in order to master the coevolution of organization and environment as interdependent levels of analysis.

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METHOD Generally, market process theory applied in this work is connected with particular challenges as to empirical research and methodological possibilities. Facing the subjectivist nature and the positioning of market process theory as a part of the interpretative paradigm (Burrell & Morgan, 1979), the traditional anchor point of critical rationalism – as formulated by Popper (1945) – does not ﬁt. The reason for this is the limited possibility to generalize ﬁndings when idiosyncrasies occur. Given the above-mentioned basic assumptions, formalized quantitative empirical work does not seem to be appropriate. For this reason, we found it adequate to borrow qualitative methods from social sciences. They ﬁnally enable us to follow Hayek’s (1964) remedy to identify patterns within evolutionary development processes. This way, the set of qualitative methods of empirical research we apply is basically embedded into Maxwell’s (2005) interactive approach to qualitative research designs. Fig. 1 gives a survey on cornerstones of our research visualized in Maxwell’s framework. In the context of this framework – and embedded in a more comprehensive longitudinal study to explore features, entrepreneurial challenges, and conceived solutions to master organization/environment coevolution in transforming industries – the research question is addressed. To ensure a comprehensive analytical understanding of the subjects of analysis, we followed the recommendation to focus on one industry sector in this study (Charmaz, 2006), namely the German pharmaceutical industry. Because of the early stage of research, we adopted grounded theory ideas (Charmaz, 2006; Glaser, 1978; Strauss & Corbin, 1998) in combination with case study research (Eisenhardt, 1989; Leonard-Barton, 1990; Yin, 2003b) to perform data collection and analysis as an interrelated process. In doing so, our initial research objective, why ﬁrms do lobbying, was enriched by second objective during the research process, namely to gain insights on how they do it and what general mechanisms they assume to apply when lobbying. For economic research questions and through the abovementioned Maxwell framework, we opted to follow Strauss’ interpretative approach rather than Glaser’s positivistic one. This allows us to conduct the ﬁeldwork following the Austrian School and the competence-based theory (which we are seeking to enrich) and to use our industry background in the sector under investigation. Starting point is existing theory in the conceptual framework (Austrian School, CbTF) as a lens through which phenomena observed in the ﬁeldwork are interpreted and used in a precise manner.

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WHY– Common bases

Protect specific investments or assets

Steer development paths and trajectories

Create own or destroy competitors’windows of opportunities

Accelerate or slow down external changes depending on one’s own relative flexibility

Contribute to draft laws

Collaborate in various forms Manage campaigns and opinion making Influence expectations and decisions selectively and indirectly

(to use self enforcing paths and positive feedbacks)

HOW-Awareness of mechanisms

Fig. 1.

Framework of an Interactive Research Design (Adapted from Maxwell, 2005).

We chose the German healthcare sector – in particular the pharmaceutical market – as the context for the analysis. Besides the fact that this sector is especially a domain of lobbying activities, these could be observed very well and analyzed in times of the comprehensive healthcare system change in 2004 (of which the results were revisited for reasons of robustness in the context of another reform in 2006/2007). In order to ‘‘catch reality in ﬂight’’ (Pettigrew, Woodman, & Cameron, 2001) when addressing the underlying research question, we set up a panel of 14 upper management executives from relevant value chain stages and special interest groups in the German healthcare for longitudinal analyses. This panel has been meeting about quarter-annually since the year 2004. Our research was backed up by using multiple sources of data, comprising nine focus group workshops, several expert interviews, a Delphi analysis, two further written inquires and written primary and secondary documents (memos, newspaper articles, analyst reports, internal documents), as well as direct observations for the purpose of triangulation (all for the purpose of addressing further research questions of our longitudinal study of organization/environment coevolution, too).

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For improving the quality of the research, a number of procedures were adopted throughout the study. To justify the robustness of the results, we reviewed numerous sets of criteria (Flint, Woodruff, & Gardial, 2002; Miles & Huberman, 1994; Yin, 2003a) being oriented on the research process. Like other authors in the ﬁeld of management science (Beverland & Lockshin, 2003), we adopted the results of the Flint et al. (2002) review on relevant criteria for evaluating the trustworthiness of our work. They took credibility, transferability, dependability, conformability, and integrity from interpretive research (Hirschman, 1986) as well as the criteria of ﬁt, understanding, generality, and control from grounded theory (Strauss & Corbin, 1998). For details on how these criteria were addressed, cf. appendix.

RESULTS During our ﬁeldwork and data analysis it became obvious that lobbying, its motivations, and ways of conducting are manifold. Especially given the above-elaborated fact that from a competence-based management perspective research more or less starts on a green ﬁeld, the results section is divided into two parts, allowing to comprehensively cover the observed phenomena as well as testable results. First we summarize the insights from the exploratory part of the study, reﬂecting broad categories as responses to our research question. The intention of that part will primarily be to demonstrate the richness of the phenomenon and to outline the research arena, which opens up when analyzing lobbying from a competence-based management perspective. Where possible within the scope of the study the second part goes more into detail with some of the ﬁndings and presents selected results that could be formulated in the form of iteratively derived propositions as cause–effect relations.

Richness of the Phenomenon In the iterative framework of theory-driven analysis on details of organization/environment coevolution as described above, we addressed mainly the question of what drives ﬁrms to engage in lobbying activities from the angle of competence-based management and CbTF. We also got ﬁrst ideas concerning how the agents realize lobbying. On analyzing this rather broad research question in the German healthcare in the context of its

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Understand details of organization/environment co-evolution

Austrian School, Competence-based Theory of the Firm, Healthcare Sector

as overall objective

as conceptual contexts

Why drives firms to engage in lobbying activities? as research question

Longitudinal case study research

ROBUSTNESS OF RESULTS

as method applied

Fig. 2.

Common Bases and Mechanisms Used When Engaging in Lobbying Activities.

2004 and 2006/2007 reforms, quite a lot of patterns as common bases for lobbying activities could repeatedly be observed. Even if they differ in detail and execution, as a pattern (Hayek, 1978) on a high level of abstraction the following explications all fulﬁll the validity and trustworthiness criteria according to the appendix. Fig. 2 gives an introductory overview on common bases (‘‘why’’) and the diverse mechanisms (‘‘how’’) of lobbying analyzed during the study and that will be explained subsequently. In one way or another – but without explicitly labeling it with such terms themselves – ﬁrms mainly use their lobbying activities to steer development paths and trajectories, which they identify as or assume to be advantageous to them, at least by improving their relative competitive position. This happens, for example, in the form of selective provision of information to government decision makers (as it is the typical textbook subject of lobbying, cf. Baron, 2006) in order to inﬂuence the ‘‘rules of the game’’ (i.e., laws, industry regulation, etc.). Within the scope of the case study, nearly every interest group within the German healthcare industry had its lobbyists at least being in contact with politicians when the healthcare system reforms

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were negotiated. In extreme, lobbyists were also delegates to ministries in order to help formulating draft laws. However, according to the above-given deﬁnition of lobbying, politicians need not be the only target of lobbying – and in fact they are not. Likewise, but in a wider sense, the direct (through communication) or indirect (through action) provision of information or signaling also aims at other market participants and especially their expectations. Agents are then more or less seeking to achieve a ‘‘selffulﬁlling prophecy,’’ including the initiation and enforcement of information campaigns and opinion making. In such cases, we observed that opinion leaders with smart lobbying strategies are able to manage other market participants to follow them like ‘‘lemmings.’’ That means that single players or small groups of players (opinion leaders) show a strong commitment (at least in their communication, but also by investing) to speciﬁc scenarios in the future. The majority of players (the ‘‘lemmings’’), however, take the inevitability of such scenarios for granted without challenging it and seeing that there are alternatives with basically an equal probability. During our study this opinion leader and ‘‘lemming’’ constellation was observable several times, often when a ﬁrm’s (opinion leader) own development depends on or at least is fostered by complementary action of other players (in healthcare, for example, when it comes to settle the acceptance of new forms of care provision, e.g., mail-order pharmacies, chains of pharmacies). Firms do lobbying on a stand-alone basis, but very often also in collaboration with other organizations that have similar steering objectives. One crucial point in the context of lobbying is the existence of so-called ‘‘special interest groups’’ or ‘‘lobbying groups’’ in which ﬁrms join forces to represent and/or manage their interest together (Lyon & Maxwell, 2004). They are typically deﬁned as agents who consider similar actions or directions of taking inﬂuence on their relevant business environment as adequate to foster the achievement of their individual goals. However, in the ﬁeldwork it turned out that these similar interests are quite often also rooted in resource- and competence-oriented phenomena, i.e., ﬁrms with similar resource/competence proﬁles or gaps have rather equal general lobbying interests. Thus, lobbying groups can rather be considered as ‘‘strategic groups’’ of agents (Hunt, 1972), sharing similar interdependencies (in terms of positive feedbacks as well as resource and competence speciﬁcity) with a set of parameters of environmental conditions. Going deeper into the ﬁeldwork, the healthcare sector belongs to those industries that necessitate large (and uncertain) investments before launching innovations to the market. This is, for example, true in the case of the pharmaceutical industry doing research and development for new

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agents or drugs, but also for business model innovations. An example for such a business model innovation in our study was a company that developed a business model production site for industrially re-packing pharmaceuticals from their retail boxes and blisters to individual daily blisters for patients in order to enhance compliance and avoid misuse. In both cases, the extent of ﬁrms’ revenue from the investments depends particularly on the regulatory environment, for R&D at least concerning patent regimes, pricing schemes, etc., and for business model innovations more fundamentally regarding their legal feasibility and their acceptance by, for example, patient beneﬁt managers (PBMs) and/or insurances as group purchasers. In this context, one common base for ﬁrms’ or organizations’ lobbying is the protection of speciﬁc investments or assets, either in form of fostering their ﬁrst-best use, or intending to build up second-best uses. In the case of the German healthcare industry with its groundbreaking reforms there is a lot of environmental muniﬁcence which opens strategic windows for innovative and alert entrepreneurs. In the cases under investigation there were many of such windows of opportunities for several groups of agents. As one example, the combination of the diffusion of the internet, patients’ changed lifestyle, and a regulatory change made it possible to found mail-order business models for pharmacies in Germany, what several players with necessary competence proﬁles considered as an opportunity for a new venture (Gersch, 2004). In situations like that the potential innovators or new entrants lobbied for the regulative change to open the window of opportunities whereas incumbents did so to destroy or avoid such strategic windows of others. Furthermore lobbying is applied to accelerate or slow down external changes depending on one’s own relative ﬂexibility or adaptability to changes. We could especially observe this in the context of the introduction of a nationwide health telematics infrastructure (‘‘Die Gesundheitskarte’’). Due to enhanced efﬁciency and effectiveness, it is undoubted that the net beneﬁts of such e-health infrastructures are positive. However, as it requires some groundbreaking changes in process structures and IT design of all healthcare organizations, not all players in the sector buy into this project at an equal extent. We observed highly professionalized groups of agents (e.g., hospital chains) for whom an introduction and connection was a logical consequence of their own business reengineering. They made lot of efforts (vis-a`-vis the government decisions makers and other complementary groups in healthcare) to accelerate the introduction – also in order to leave other players in the dust, which were expected to lose competitiveness or competitive advantage through a fast introduction due to their structural

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inertia. Consequently and vice versa, these were the groups whose lobbying activities aimed at slowing down the speciﬁcation and rollout of the health telematics infrastructure. The cases we studied allowed us to go beyond these exploratory results when we observed single occurrences of the patterns quite similarly in different contexts. If that was the case – and according to the trustworthiness criteria in the appendix – we formulated propositions as cause–effect relations on lobbying out of our ﬁndings. Both their level of detail and their emphasis differ due to the fact that we only formulated those ﬁndings as propositions, which we considered to be a robust representation of our data. We interpret these ﬁndings against the theoretical background of the CbTF and will therefore present them in a way going beyond the case and connected to the existing literature of the respective contexts. Propositions Starting point for this deeper analysis and axial coding and categorizing (Charmaz, 2006) of the qualitative data was the basic idea that is also mentioned in the extant literature on lobbying: due to organizational inertia, ﬁrms are not able to react on or to remain competitive in all conceivable scenarios of environmental conditions and especially paths of change. Therefore, they engage in lobbying. Embedded in evolutionary developments of relevant markets and industries, points in time can be identiﬁed which are characterized by their importance for the direction of future developments (e.g., due to fundamental decisions or even by accident). At these so-called ‘‘points of bifurcation’’ for relevant institutional contexts (Arthur, 1989), a positioning of future cornerstones appears to be vital. ‘‘Forecasting the future or shaping it?’’ (Simon, 2002) – Instead of passively adapting to changed environmental conditions, lobbying activities directly aim at goal-oriented attempts to exert inﬂuence and to steer changes in the relevant business environment, basic conditions underlying every market process, or institutional migration paths at these points of bifurcation. Acknowledging their discretionary potential to act, agents seek to achieve strategic ﬁt this way (Morgan & Hunt, 2002; Volberda & Lewin, 2003; Zajac, Kraatz, & Bresser, 2000). Proposition 1. When agents assume a ‘‘point of bifurcation’’ in their relevant business environment, they will evaluate and take measures to inﬂuence further developments for the sake of their own (relative) competitiveness.

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Aggregating directions of lobbying activities – as observable in the ﬁeldwork in the German healthcare sector – to a very high level, drivers that engage in such lobbying activities can very well be traced back to basic mechanisms inherent in the evolutionary CbTF. The ﬁrst of these mechanisms comprises path dependencies: one main characteristic of path dependency in the narrow sense is the existence and effectiveness of self-enforcing development processes. So-called ‘‘positive feedbacks’’ (increasing returns) are one reason for self-enforcing developments (Arthur, 2000; David, 1994; Sterman, 2000) when they initiate a kind of automatism of further development. Starting with increasing returns and ‘‘asset mass efﬁciencies’’ (Dierickx & Cool, 1989) (e.g., by learning curves or secondary beneﬁts of usage or complementarity), self-enforcing development processes emerge more or less automatically and without any further impulse or intervention, or rather initiated by small decisions and events. This can typically not be anticipated or planned. Self (re-)enforcing processes can apply to every level, the environmental, the institutional, and the ﬁrm (here, for example on resource and competence development). The stronger these effects are on the level of resources and competences, the less likely there will be danger of imitation on the one hand, however, on the other hand, more limitations will be placed on the freedom to explore them (Jansen, van den Bosch, & Volberda, 2005). In this context, motivations for lobbying activities to initiate, break, or steer environmental/institutional paths can particularly be found in the so-called ‘‘complementarity effect,’’ leading us to derive the following propositions mirrored in the ﬁeldwork. Proposition 2. Firms will engage in lobbying activities when their own resources’ and competences’ value relies on complementarities and positive feedbacks with elements of their relevant environment within trajectories. Inertia through temporally interconnected events and decisions can also be initiated through economic rigidities, without any self-enforcing effects. However, through limited transferability diverse forms of rigidities can also have an effective impact on players’ decisions-to-come. In this context, speciﬁcity is of high importance. The understanding of speciﬁcity as, for example, in transaction cost economics is usually a comparative static one, comparing alternative usage of one or two users in one or two points in time. This then leads to an understanding of speciﬁcity as net value difference between ﬁrst-best and second-best usages of investments or created assets (cf. the deﬁnition of quasi-rents by Klein, Crawford, & Alchian, 1978).

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Interpreting speciﬁcity in an evolutionary way, numerous effects are to be considered which have the potential to change an evaluation once conducted for resources and competences over time. Exemplary effects in this respect are, for example, changes in the (institutional) environment, new knowledge on alternative uses, or qualitative changes of the assets over time. Hence, players’ strategies of ‘‘(de-)speciﬁcation’’ can lead to an extension or narrowing of available alternatives for action and corridors of development. Thereby, also resources and competences necessary to render a competitive output on the ﬁrm level generally show a more or less high speciﬁcity concerning partners and/or usages (Ghemawat & del Sol, 1998; Ghemawat, 1991). A change in market requirements or environmental conditions that is accompanied with a changing ﬁrst-best and/or second-best alternative for use can therefore also be considered as a threat of invalidation of available resources and competences. Seeking competitiveness, agents therefore force those environmental development paths, which allow a continuous ﬁrst-best usage of their potentials. This can mean a goal-oriented stabilizing of existing environmental conditions as well as intended destabilizing. The latter is especially forced by those with superior reactivity compared to competitors. Again and again, they try to surprise other (competing) market participants through forced discontinuities. Proposition 3. The higher the speciﬁcity of resources and competences from an agent’s point of view and the more likely environmental conditions are subject to changes, the more intensive agents will engage in lobbying activities. On the other hand, lobbying activities can also be embedded in ﬂexibility strategies in order to ‘‘de-specify’’ resources and competences by paving the way for their exploitation and the creation of new ‘‘second-best’’ usages. Proposition 4. The higher the assumed uncertainty of the future value of a ﬁrm’s existing resource and competence base at one point in time, the more lobbying activities it will undertake to either settle the ﬁrst-best use or in order to create valuable second-best alternatives. Compared to ‘‘constructive lobbying’’ in order to enhance one’s own ‘‘ﬁt,’’ ‘‘destructive lobbying’’ is of at least the same importance. ‘‘Destructive lobbying’’ can be observed when ﬁrms try to hamper the competitors. This on the one hand comprises the evasion of evolving individual ‘‘windows of opportunity’’ for potential competitors, as well as to impede lobbying engagement of competitors as described in Propositions 2 and 3.

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Proposition 5. When agents assume individual ‘‘windows of opportunity’’ of potential competitors, they will engage in lobbying activities in order to close these windows. Proposition 6. When agents assume to have a superior adaptability to environmental change compared to their competitors (e.g., due to less positive feedbacks on a narrow pathway or less speciﬁcity of their resources), they will engage in lobbying activities in order to increase environmental dynamics in their favor.

SUMMARY AND OUTLOOK Quite fundamentally and on a high level of aggregation, this paper does a ﬁrst exploration on the question of what drives ﬁrms to engage in lobbying activities. Second, it offers ﬁrst ideas on how agents operate from a competence-based perspective. Another cornerstone of the research was to derive ﬁndings that ﬁt state-of-the-art concepts of strategic management. It turned out that the evolutionary CbTF as part of market process theory is especially applicable to this venture. The phenomenon of lobbying can be explained very well with the competence theories’ rationale, as especially path dependencies and resource/competence speciﬁcity cause organizational inertia and limited adaptability to (all conceivable or) changing environmental conditions. This is the common ground for lobbying activities, since interfering in the evolution of such conditions is the aim of lobbying. The exploration and the propositions presented in this paper represent a ﬁrst step in the endeavor to anchor lobbying more than before in the academic discussions or strategic levers and into the rationale of resourcebased and competence-based strategic management. The aspects of each of the propositions seem to be a fertile ground for subsequent and in-depth research, as well as a deeper view into organizations, exploring how they are built and renewed for different lobbying purposes.

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APPENDIX. CHECK OF TRUSTWORTHINESS BY APPLYING THE CRITERIA OF FLINT ET AL. (2002) Trustworthiness Criteria Credibility: Extent to which the results appear to be acceptable representations of the data

Method of Addressing in This Study Conducted interviews and market

observation continually for 4 years, with the panel-experts for 1, 5 years Third persons involved in categorizing Findings and milestones presented for discussion and adjustment of the executive panel (which provided the majority of data) Protocols with interpretations regularly returned to participants Extraction of results through a research team of three with mutual justiﬁcation of the results

Result: Emergent ﬁndings and propositions were altered and expanded

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APPENDIX. (Continued ) Trustworthiness Criteria Transferability: Extent to which ﬁndings from one study in one context will apply to other contexts

Method of Addressing in This Study Theoretical sampling Weakness, that results were generated

exclusively with data from the healthcare sector was tackled through the abstract development of ﬁndings consistent to market process theory basic assumptions. Additional discussions with representatives from the steel, music, and education sector, who basically conﬁrmed the ﬁndings for their industry, as well Result: Findings were represented by multiple data sources and all panelists

Dependability: Extent to which the Design as longitudinal analysis (including ﬁndings are unique to time and interviewees focus groups members) place; the stability or consistency Panelists and interviewees reﬂected on of explanations current and recent events and experiences Results not anchored in ‘‘ﬁxed real-world events’’ Result: Found consistency in the phenomena for multiple points in time; consistency in the participants’ stories Conﬁrmability: Extent to which interpretations are the result of the participants and the phenomenon as opposed to researcher bias

Milestones of research also presented and

discussed with other researchers on conferences and interdisciplinary research workshops at our university Comprehensive industry image through participants from every value chain stage in the German healthcare sector Result: Findings and propositions were altered and expanded

Trust built with longitudinal participants Integrity: Extent to which interpretations are inﬂuenced by (interviewees, panelists) Nonthreatening nature of interactive misinformation or evasions by elements, motivation to achieve ‘‘win–win’’ participants situations with the participants Always numerous sources of data

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APPENDIX. (Continued ) Trustworthiness Criteria

Method of Addressing in This Study Triangulation with comprehensive

secondary data When nonconﬁdential, protocols were

returned to all panelists with the request to comment irregularities Eyes open for participants trying to evade the issues being discussed Result: Participants were very open about issues being discussed; no evidence for missing integrity Fit: Extent to which ﬁndings ﬁt with the substantive area under investigation

Through interactive approach always

having in mind research goal and research question Through interpretative approach always having in mind the conceptual/theoretical framework Result: Findings were more deeply described, also backed with extant literature on the topics

Understanding: Extent to which participants buy into results as possible representations of their world

Written survey on importance and relevance

with the panelists after concluding focus group workshop conﬁrmed relevance of the three motives to ally Ongoing presentation of ﬁndings and interpretations with colleagues, participants and in industry forums Result: Colleagues and practitioners bought into the ﬁndings

Generality: Extent to which ﬁndings discover multiple aspects of the phenomenon

All interactively generated data (interviews,

focus group workshops, questionnaires) gave explicit opportunities for new facets of phenomena Repeated (longitudinal) interviews with numerous key informants Result: Captures multiple aspects of the phenomenon

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APPENDIX. (Continued ) Trustworthiness Criteria Control: Extent to which organizations can inﬂuence aspects of the theory

Method of Addressing in This Study Panelists and interviewees would have some

degree of control over their organizations’ lobbing strategies (strategic intention), not however on detailed outcome Result: Involvement of the participants in the issue exists

COMPETENCE-BASED STRATEGIES OF SERVICE TRANSITION Tim Kessler and Michael Stephan ABSTRACT As an answer for the limited growth potentials of diversiﬁcation and internationalization, services became increasingly important for industrial ﬁrms in recent years. Based on existing and established business concepts, companies explore new segments in their traditional value chains beyond traditional market penetration strategies: they pursue service transition strategies to open up new sources for growth, even in markets that do not promise great expansion potential. Our paper addresses the issue of economies of scope of service transition. In this context, we ﬁrst explore the question, to what extent the insights about product diversiﬁcation strategies from physical goods sectors can be transferred to the service sector. Using competence-based considerations on diversiﬁcation we focus on dynamic economies of scope, whose central idea is exploration and development of new resources rather than the static exploitation of existing ones. Furthermore, we integrate the largely neglected issue of how the phenomenon of service diversiﬁcation depends on the industry’s life cycle stage. In a small empirical study of the German mechanical engineering industry we demonstrate that diversiﬁcation steps into services require a shift in the resource and competence base of ﬁrms. Enhancing Competences for Competitive Advantage Advances in Applied Business Strategy, Volume 12, 23–61 Copyright r 2010 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1108/S0749-6826(2010)0000012005

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Using a dynamic perspective, we construct a conceptual framework for analyzing and explaining the advantages of service transition strategies. The developed model describes a service diversiﬁcation trajectory and points out that the establishment of a proﬁtable service business requires the exploration and development of competences and adequate organizational structures.

1. THE RELEVANCE OF SERVICES FOR MANUFACTURING FIRMS: SERVICE TRANSITION AS A SOURCE OF GROWTH AND COMPETITIVE ADVANTAGE The world’s largest multinational ﬁrms (MNCs) are actively engaged in a multitude of businesses and geographical markets, cooperate with a plethora of external partners and usually leverage on a broad resource and competence base. MNCs use these strategic directions of corporate action to realize growth as a major trigger of proﬁts and value creation. However, contemporary management research on corporate growth has predominantly focused on appropriate growth modes, i.e., the issue of how growth should be realized and implemented. The polar extremes in this context are internal versus external modes of growth. Internal, organic modes of corporate growth aim at the internal accumulation of resources, whereas external growth modes refer to the acquisition of resources in organized forms via mergers or acquisitions of other ﬁrms. Beyond the issue of internal versus external growth modes, companies face the question: in which direction should corporate expansion be targeted? Firms have the choice to either intensify or expand their activities along several strategic dimensions. First of all, ﬁrms can grow by intensifying their activities in existing businesses. This approach to growth is widely known as market penetration (or market development) strategy: in other words, increasing sales volumes in existing markets with existing products. At the same time companies may reduce cost by realizing economies of scale. A penetration strategy may have some merit in the short run if the market is growing, but the ﬁrm is likely to encounter intense competition as the market matures. Slywotzky and Wise (2003) use the metaphor of ‘‘back-and-forth jockeying,’’ where the advantage of one competitor is undone by a slight improvement and incremental innovations of the other. The resulting minor competitive advantage does not promise sustainability. Thus, the growth

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effect of market penetration strategies is limited (Sanchez & Heene 2004). Long-term growth can only be achieved by expansion of the ﬁrm’s (business) activities (Gerybadze & Stephan, 2003, 2004). Perhaps the most prominent strategic dimension of a ﬁrm’s expansionary activities is product diversiﬁcation. Ever since the work of Penrose (1959) and the empirical investigations of Rumelt (1974), product diversiﬁcation has received plenty of attention. Literature on product diversiﬁcation (and its effect on corporate performance) has been a mainstay of strategic management research. Various lines of theoretical explanations have been put forward to explain the diversiﬁcation phenomena as corporate growth strategy. Starting in the United States right after the Second World War and in the rest of the Triad countries in the 1960s and 1970s, many companies diversiﬁed their product base widely and followed conglomerate growth strategies. One justiﬁcation of conglomerate diversiﬁcation was risk reduction by pooling together unrelated businesses. However, since the end of the 1980s a change took place when companies started to refocus on a few related core product lines (Markides & Williamson 1996). The desired positive growth and performance effects, namely economies of scope and risk reduction, were not realized by most of the corporations. At the latest, when capital markets started to grant a conglomerate discount on product diversiﬁcation strategy, most ﬁrms refocused and divested a large number of non-core businesses (e.g., Gerybadze & Stephan, 2003, 2005a; Markides & Williamson, 1994, 1996). Instead, ﬁrms in the 1990s started to bet on another expansion strategy – internationalization. Over the past two decades, ﬁrms have intensiﬁed their efforts to internationalize their sales (and production) and entered foreign markets through exports, foreign direct investment, or cooperative market entry strategies. The geographical expansion or internationalization of the markets in which the company is active leads to an increase in output and allows for economies of scale. The trend toward globalization of business has been observed in ﬁrms across all industries and Triad countries. However, it has also been observed that ﬁrms focus their internationalization strategies on their core products in which their superior competitive advantage allows for the successful expansion into foreign markets. At the same time, most ﬁrms also concentrate their expansion efforts not only on a small set of core products but also on a limited set of foreign markets which are either closely related to their home markets (by small cultural distance, etc.) or instead offer large growth potentials. However, since the beginning of 2000, the undamped internationalization fever has come to a halt in many industries. For most ﬁrms, the growth potential in the attractive markets and product lines has

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obviously become saturated (Beyer & Stephan, 2006). With global oligopolistic competition (‘‘global back-and-forth jockeying’’) in their core businesses and core foreign marketplaces, MNCs must look for new avenues of future growth. Since the beginning of the 2000s, in most OECD countries industrial ﬁrms have been banking on a new growth dimension to answer the limited growth potentials of diversiﬁcation and internationalization. Based on existing and established business concepts they explore new segments in their traditional value chains beyond traditional market penetration strategies: companies diversify into product-related and unrelated services. They develop new service offerings which resolve the problems of their customers and help to improve their customers’ performance. With diversiﬁcation into services (we will use the terms service diversiﬁcation and service transition as equivalents), industrial ﬁrms open up new sources for growth, even in markets that, due to their maturity, do not promise great expansion potential. Beyond its growth potential, service diversiﬁcation also tends to have a positive performance impact. First of all, service diversiﬁcation is regarded to have a positive impact on the risk performance of ﬁrms. Services, it is argued, are less cyclical than the hardware business and help to smooth revenue and proﬁt ﬂuctuations. Especially in recessive periods, ﬁrms tend to cut investments into new equipment and rely on maintenance, replacement and repair services, etc. Consequently, diversiﬁcation in industrial services reduces the ﬁrm-speciﬁc risk (Monitor Group, 2004). Beyond risk performance service diversiﬁcation is also considered to have a positive impact on proﬁts and enables ﬁrms to realize superior growth (Skaggs & Droege, 2004). Both resource- and market-based arguments are put forward to substantiate the positive growth and performance impact: (1) The market-based view (‘‘industrial organization’’ theory) argues that especially in the service segments of an industry’s value chain the competitive forces are much weaker due to the speciﬁc characteristics of services. Services feature more immaterial elements and components than physical products and are, in most cases, more customer speciﬁc and cannot be standardized. This makes it more difﬁcult for customers to compare between the various service offerings of competitors. Information asymmetries create switching costs, customer loyalty and barriers to change the service (and product) provider. Customer loyalty and barriers to change are further reinforced by the direct contact with the service provider due to the need for ‘‘integration of the external factor’’ in most service businesses.

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(2) The resource-based view (RBV) of the ﬁrm focuses on the idiosyncratic resources and competences that are required to deliver customer-speciﬁc solutions and services (Barney, 2007; Teece 2009). The RBV’s line of argumentation centers primarily on knowledge-intensive business services (KIBS). It is argued that in contrast to the production of physical goods, which is based primarily on standardized and marketable manufacturing resources, such as raw materials, standard processing machinery, or blue collar labor, the production of KIBS relies primarily on idiosyncratic resources and competences (Miles, 2003). KIBS are tailored to the individual customer’s needs. Thus, KIBS production requires the deployment of specialized technological resources (e.g., IT), highly qualiﬁed labor and elaborated organizational know-how (e.g., about customer processes). Altogether, such an integrated bundle of specialized resources is difﬁcult to imitate. Furthermore, the repeated deployment of this idiosyncratic bundle of resources to develop customer-speciﬁc solutions builds ﬁrm-speciﬁc competences in developing and delivering customer-speciﬁc high-quality services. In the view of the RBV, these competences provide the basis for a sustainable competitive advantage, not only in the service business itself but also in service-related products. According to these arguments, with service diversiﬁcation ﬁrms leave behind the ruinous price competition and develop new growth potentials even in traditional mature industries. Fig. 1 illustrates the different avenues of corporate growth discussed above. If industrial services are indeed such a prospective growth area, then the question arises as to whether this kind of services business is open for all kinds of companies (including pure service providers) or whether it is restricted to ﬁrms with a business stake in the underlying hardware. More speciﬁcally, in our paper we will address the issue of economies of scope of service diversiﬁcation, i.e., the types of advantages that industrial ﬁrms can realize over pure service providers (or nondiversiﬁed industrial ﬁrms) when they diversify into (product-related) services. In this context, we ﬁrst explore the question: to what extent the insights about product diversiﬁcation strategies from physical goods sectors can be transferred to the service sector. Which peculiarities and idiosyncrasies of services must be considered in the context of service diversiﬁcation? A critical synopsis of traditional diversiﬁcation literature and economies of scope arguments leads us to view diversiﬁcation into product-related services by means of a Schumpeterian diversiﬁcation process. Using competence-based considerations on

Fig. 1.

Step 2

Market Penetration Step 1

Step n

Step 2

Service Diversification Step 1

Core Business of the Company

Product Diversification Step 1

Step 2

Step n

New Focus of Corporate Growth Strategies in the 2000s

International Expansion Step 1 Step 2

Step n

Focus of Corporate Growth Strategies in the late 80s, 90s & early 2000s

Service Transition as a New Avenue of Growth. Source: Modiﬁed from Gerybadze and Beyer (2003).

Step n

Focus of Corporate Growth Strategies in the 60s, 70s & early 80s

28 TIM KESSLER AND MICHAEL STEPHAN

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29

diversiﬁcation, we focus on dynamic economies of scope, whose central idea is exploration and development of new resources rather than the static exploitation of existing ones (Bjurklo, Edvardsson, & Gebauer, 2009). Our paper adds to the (small) body of literature on service diversiﬁcation as it presents new insights into dynamic economies of scope effects with regard to service diversiﬁcation. Furthermore, we integrate the largely neglected issue of how the phenomenon of service diversiﬁcation depends on the industry’s life cycle stage: in other words, what role do (related) services play at different stages of an industry’s life cycle? Consequently, our framework combines elements of the competence-based view on dynamic scope effects of diversiﬁcation with insights from evolutionary economics on industry life cycles concepts. Finally, in a small empirical study of the German mechanical engineering industry we demonstrate that diversiﬁcation steps into services require a shift in the resource and competence base of ﬁrms. Existing resources have to be aligned to changing ﬁelds of application. The possibility of transferring answers from existing goods or service sectors to new service business areas advances the company’s ﬂexibility and broadens its service horizon. Companies develop competences to realize economies of scope also in the diversiﬁcation into unrelated service areas. In this context we also make the case that successful service transition follows a certain trajectory. It can be shown (i.a.) that especially the incremental development, i.e., the use of existing competences from previous diversiﬁcation steps, creates successful service models and businesses. The article concludes with a critical discussion of the conceptual framework and suggestions for future research.

2. A RESOURCE-BASED VIEW OF SERVICE TRANSITION 2.1. Neoclassical Arguments for Related Product Diversiﬁcation Why do manufacturing companies diversify into industrial services? What kind of advantage do diversiﬁed ﬁrms that operate in physical goods production and in the industrial services sector have over ﬁrms that are not diversiﬁed? The theory on related product diversiﬁcation represents the starting point for the creation of a conceptual framework for the explanation of diversiﬁcation into the industrial services business. At the outset of our theoretical reﬂection stands the notion that the service diversiﬁcation of physical goods manufacturers constitutes a special form of related product

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diversiﬁcation. Economic research, especially strategic management research and the theory of the ﬁrm, have intensively dealt with product diversiﬁcation and its determinants. A central impetus for product diversiﬁcation is the increase of proﬁts. Proﬁtability is reached via horizontal diversiﬁcation into related business areas and by realizing economies of scope. Following this argument, related horizontal diversiﬁcation leads to an increase of earnings: ﬁrst via the proﬁtability of the new business area and second via economies of scope – achieved by the interaction of old and new business areas. Related diversiﬁed companies have an advantage compared to other companies because the integrated production of related offerings leads to reduced costs and/or performance improvements as opposed to separate, isolated production (Stephan, 2005b, 2003). In the neoclassical view, economies of scope arise because of the common use of sharable ‘‘inputs’’ in several product lines of the diversiﬁed company. In this traditional perspective, economies of scope result from the conjoint use of sharable input factors in related business areas of the ﬁrm. According to Panzar and Willig (1981), economies of scope prevail, when it is less expensive to produce two or more product lines in one company instead of producing these product lines separately. Two conditions must be met to realize economies of scope in the neoclassical sense: there must be two or more product lines in which these inputs can be used, and there should be no rivalry in use; in other words, the common use of these input factors in the production of output A should not cause any bottlenecks in the production of output B. Once provided for the production of product A, the inputs are available for the production of product B (and others) without any signiﬁcant additional costs. Panzar and Willig (1981) distinguish four types of common use: 1. Time-lagged use of production capacities in several product lines sequentially; 2. Simultaneous use of overcapacities in equipment investments, assets, or buildings in the production processes of several product lines; 3. Secondary use of residuals of production factors that are only partly bailed out in the primary production process in the ﬁrst product line; 4. Use of by-products of the original product line by other product lines. The prerequisite for the shared use of the input factors in the second product line is, of course that the ﬁrst product line cannot make full use (of the capacity) of the input factors at hand. At this point it is important to distinguish between ‘‘consumption factors’’ such as fossil fuels and ‘‘deployment factors’’ such as machine tools. With ‘‘consumption factors’’

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a surplus emerges if inputs are only partly used for the primary usage and a secondary use is possible. In the examples of Panzar and Willig (1981) the secondary use can refer to by-products or residuals of the primary use. The joint use continues until the physical exhaustion of the input factor. In production theory this phenomenon is called joint production. The case is slightly different with the ‘‘deployment factors.’’ A surplus of deployment factors stems from an unused capacity, i.e., the output of the primary product line cannot be stretched until full use of its capacity is achieved and the deployment factor itself is inseparable or not completely separable. In this case the factor has a ﬁxed capacity that cannot be adjusted to the output quantity, and vice versa. If there is only a single product line, the free capacity is vacant. In case there is a second product line, the surplus capacity can be used without additional cost. Unfortunately, this neoclassical concept of scope economies (which is deeply rooted in the production theory of physical goods) and the corresponding typology of production factors cannot be applied for the explanation of diversiﬁcation into industrial services. Two considerations block the unmodiﬁed transfer of arguments: 1. Due to the constitutive characteristics (Campbell & Verbeke, 1994; Clark, Rajaratnam, & Smith, 1996; Cloninger & Oviatt, 2006) inherent to most services, the explanation of economies of scope by using surplus physical input factors is not applicable – or only partly applicable. Three characteristics must be considered in particular: Intangibility: In contrast to the production of physical goods commonly usable consumption factors (by-products or residuals) play a subordinate role in the production of services. Admittedly, services consist of both physical and immaterial components, but the physical components usually play a subordinate role (Burr & Stephan, 2006). Immaterial inputs that are of critical relevance in services production cannot really be ‘‘used up.’’ Perishability: An isolation of sales and production and therefore inventories to buffer ﬂuctuations in demand are impossible with services. Offers that are produced, but not directly sold are lost (Maleri, 1997). This characteristic particularly limits the possibility of a time-lagged use of production capacities. Unused capacities of deployment factors are lost. Simultaneity and integration of the ‘‘external factor’’: Most service outputs are consumed as they are produced. Simultaneity limits the potentials of economies of scope based on the common use of

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surplus input factors because most services cannot be delivered with a time lag. 2. The neoclassical, production-theoretic view does not provide any valid explanations for sustainable scope advantages and, consequently, competitive advantages from diversiﬁcation into related products or services. Diversiﬁed companies stand out from nondiversiﬁed rivals because their activities in the service sector let them realize efﬁciency and cost advantages. However, the scope economies described above can be easily realized by all competitors in the industry. Thus, due to imitation, the competitive advantage will not be sustainable. In contrast to the static neoclassical view of scope economies, we will take on a dynamic perspective which centers on immaterial factors in order to explain long-term advantages of diversiﬁcation. For the explanation of service transition, elements of the RBV of the ﬁrm are introduced. The RBV considers the ﬁrm as an accumulation of a complex combination of specialized productive assets (Amit & Shoemaker, 1993; Barney, 1986; Markides & Williamson, 1994; Penrose, 1959; Rumelt, 1984; Wernerfelt, 1984). The competence-based theory enlarges this perspective and allows for a dynamic view of economies of scope and related diversiﬁcation advantages (Foss, 1993; Hagstro¨m & Chandler, 1998; Hodgson, 1998; Loasby, 1998; Prahalad, 1993; Sanchez, Heene, & Thomas, 1996). On the grounds of this resource- and competence-based view, the subsequent sections center on the question: which combination of immaterial input factors provides the basis for the realization of sustainable scope advantages and how can these advantages, in turn, lead to a sustainable competitive advantage?

2.2. Resource- and Competence-Based Views in the Analysis of Service Transition The subsequent discussions are grounded in the RBV of the ﬁrm and the competence-based view (CBV) of the ﬁrm. In contrast to the neoclassical discussion of diversiﬁcation beneﬁts, the RBV gives up on that input factors are homogeneous and, instead, emphasizes their ﬁrm-speciﬁc nature. In this view, the notion of resource includes anything tangible or intangible that is useful and available to an organization in pursuing its goals for value creation and distribution. A central concern of our analytical framework deals with the question of what kinds of resources (‘‘sharable inputs’’) enable ﬁrms to economize on diversiﬁed businesses on a sustainable basis.

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Basically, the resources that an organization can use can be either ﬁrm speciﬁc or ﬁrm addressable. Firm-speciﬁc resources are those that are internal to an organization – the employees, its production equipment, its real estate, and its intellectual property. Firm-addressable resources are resources that an organization does not own but that it can access through market transactions or other means when needed. In addition to resources, we differentiate between assets, capabilities, and skills, and competences according to the CBV (Durand, 1998; Markides & Williamson, 1994, 1996). An asset is generally something that contributes in a clearly deﬁnable way to a ﬁrm’s value-creating activities. Assets can be either tangible or intangible (Barney, 1991). Tangible assets are physical, touchable objects such as real estate, equipment, and of course ﬁnancial resources. The intangible asset base includes the media ﬁrm’s reputation, relationships to customers and suppliers, and ideas and intellectual or technological property rights (e.g., patents and brands). The tangible assets of a ﬁrm are usually easy to trade, whereas most intangible assets are characterized as being hard to trade. Of course, a number of intangible assets such as intellectual property rights could also be subject to market transactions. Strategic assets are assets that underpin a ﬁrm’s differentiation or cost advantage in a particular market and are imperfectly imitable, imperfectly substitutable, and imperfectly tradable. When referring to our above discussion of scope effects it becomes clear that the neoclassical view of economies of scope primarily focuses on material assets that are easy to trade and, thus, do not provide the basis for a sustainable competitive diversiﬁcation advantage. In contrast to assets, capabilities and skills are action-based resources. In other words, as knowledge provides the foundation for every action that an organization undertakes, capabilities and skills could also be termed knowledge-based resources. At the most fundamental level, individuals have skills, which represent the actions an individual knows how to perform reliably in carrying out a given task. Capabilities arise in an organization when groups of individuals are able to coordinate their skills in carrying out a process of importance to an organization’s overall value-creating activities. For example, the capabilities of a mechanical engineering ﬁrm are displayed when its engineering staff develops and produces customerspeciﬁc processing equipment. Capabilities are a mechanical engineering ﬁrm’s repeatable patterns of action in the use of assets and skills. Like in any other business organization, capabilities of engineering ﬁrms involve managerial, organizational, and technical knowledge related to development, production, and delivery processes. In mechanical engineering, the

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critical skills and capabilities consist of, for the most part, knowledge of technical staff, such as mechanical engineers and product developers. Finally, competences go beyond the notion of capabilities in that they refer to the competitiveness of the organization as a whole. On the one hand, competences relate to the ability of the organization to sustain coordinated deployments of assets and capabilities in ways that help the organization achieve its goals (Sanchez et al., 1996). From this perspective, competence is an organizational characteristic that arises when strategic assets and the capabilities of the various teams and groups of people in the organization can be coordinated to work together in a way that enables the organization to achieve its goals. Prahalad and Hamel (1990) describe this view of competence as a collection of organizational abilities as: the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.

In the mechanical engineering ﬁrm example, competences are at work when the product developers, together with the production engineers, the marketing people, and the ﬁeld service manage to develop and produce innovative, high-quality and multi-technology machinery that perfectly ﬁts the customers’ needs. These competences underpin a ﬁrm’s cost or differentiation advantage in a particular market. However, Sanchez et al. (1996), Teece, Pisano, and Shuen (1997) and others have made the point that in this view competences are still ‘‘static’’ concepts, which do not allow for a sustainable competitive advantage since they do not enable companies to adapt to changing industry conditions. In contrast, in a more dynamic perception competences, then also referred to as dynamic capabilities, should concern the learning capacity of the organization and denominate the ability to create new assets (or expand the stock of an existing one) and deploy new capabilities (see also Eisenhardt & Martin, 2000; Zollo & Winter, 2002). For example, the competence of the German mechanical engineering ﬁrm Voith in successfully developing and producing couplings and gear systems for industrial applications enabled the company to diversify its business into drive train components for wind turbines. The company has learned to use its strong strategic asset base and capabilities in the mechanical engineering ﬁeld of turbo transmission in order to diversify not only into wind energy creation but also into rail, automotive and marine applications businesses. From this perspective, competences are the pool of experience, knowledge, and assets that exist elsewhere in the same corporation and can be deployed to reduce the cost or time required either

Competence-Based Strategies of Service Transition

35

to create new strategic assets and capabilities or to expand the stock of existing ones. The next section returns to the notion of economies of scope and extends the neoclassical concept to a resource-based framework of the ﬁrm. Based on the differentiated view of the company’s resource base, we develop a more precise understanding of economies of scope in the context of service diversiﬁcation. A twofold view of scope economies is presented: (a) traditional (static) economies of scope that grant the company a shortterm competitive advantage over its competitors when diversifying into services and (b) dynamic scope effects that contribute to a sustainable competitive advantage in the service and product business.

2.3. Service Transition and Dynamic Scope Effects Within the RBV and CBV, corporate assets no longer have the nature of homogeneous input factors as in the neoclassical view; they rather represent company-speciﬁc, i.e., idiosyncratic resources. We suggest that the traditional view of economies of scope as a source of competitive advantage suffers from a serious limitation: it does not consider whether the assets (or services of assets) being shared could be obtained at equivalent or even lower costs by nondiversiﬁers. Relatedness that is based on sharable assets does not necessarily underpin superior performance. Whether it does so depends on whether single-business ﬁrms can access the relevant assets in some other way. For example, a non-service-diversiﬁed mechanical engineering ﬁrm could outsource services production to a specialized service provider and realize similar production costs as the ﬁrm that diversiﬁed into services. Basically, if a single-business competitor can efﬁciently buy, imitate, or substitute the beneﬁts a business unit receives from other units within a diversiﬁed group, the diversiﬁer has no long-run advantage. Diversiﬁcation will only enhance performance when it allows a ﬁrm to exploit resources that are unavailable to its rivals at a competitive cost (Markides & Williamson, 1994, 1996; Stephan, 2005a). Not every sharable resource in a service-diversiﬁed industrial ﬁrm is, thus, a potential source of competitive advantage. Diversiﬁcation will support sustained superior returns if it allows a business to obtain preferential access to resources that cannot be purchased by nondiversiﬁers in a competitive market or cannot be replaced by some other resources that can be purchased competitively. Such resources, which are characterized by imperfect tradability, imperfect

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substitutability, and imperfect imitability, are either strategic assets or knowledge-based (action-based) resources, such as skills and capabilities (Barney, 1991; Dierickx & Cool, 1989). Consequently, service diversiﬁcation will be a successful strategy for manufacturing ﬁrms, if they can exploit strategic assets or skills and capabilities that are unavailable to other competitors, e.g., to pure service providers. These strategic assets will typically be hardware-bound resources, such as outstanding technological know-how of the engineers and product developers, a good (brand) reputation with innovative and high-quality products, simply a large installed base in the market or a widespread and trained sales force that is familiar with the hardware solutions of the ﬁrm and has the speciﬁc know-how about customer problems and processes. These strategic assets, skills and capabilities stem from the hardware business and can be used and applied for a variety of product-related services. In fact they are a precondition for rendering these speciﬁc services. Such ‘‘product-related services’’ are, e.g., Spare parts services: provision of replacement components for the physical product; Repair services: restoring physical product to sound condition after damage; Performance upgrade: replacement or addition of one or more hardware and/or software components of the physical product, which provide better overall performance; Inspections: periodical examination of physical product for ﬂaws; Maintenance: day-to-day tasks required to keep the physical product in proper condition; Technical support: provision of advice to users of the physical product via hotline, helpdesk, etc. (e.g., the global call center of an automation machine producer); Technical consulting: offering of technical expertise such as engineering skills and IT tools to solve a speciﬁc problem related to the physical product; Operation: day-to-day running of physical product/plant including all related services; Customer training: after-sales customer training or activities to familiarize customers with the use of hardware and software; Financing: supplying funds for purchase of the physical product. The notion of ‘‘product-relatedness’’ (‘‘hardware-bound’’) speciﬁes the concept of coupling between the (strategic) assets, skills, and capabilities

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Competence-Based Strategies of Service Transition

Resource bundle 1

Resource bundle 2

Resource bundle 3

Resource bundle 4

Physical & immaterial resources

Physical & immaterial resources

Physical & immaterial resources

Physical & immaterial resources

Hardware Business HBB

Fig. 2.

Hardware Business HBA

Related Service Business SBA

Scope Economies with Product-Related Services.

that have been accumulated in the hardware business and the resources the ﬁrm must command to successfully diversify into the services business. In the short-run and medium-run, a pure service provider without any stakes in hardware cannot imitate or otherwise access these resources that would be necessary to render the product-related service at similar cost, technological sophistication and quality. These hardware-bound resources promise a competitive advantage when entering the market of productrelated services (GraXy, 1993). Fig. 2 illustrates the concept of common use of resource bundles in the context of service diversiﬁcation. Here resource bundle 3 is principally bound to the hardware product A (HBA), but also serves as basis for the diversiﬁcation into the product-related service business SBA. The combined offer of hardware and related services will also provide a competitive advantage over non-service-diversiﬁed hardware suppliers. Customers might prefer a complete solution package over the isolated offer of hardware only. However, as other hardware providers realize this type of service advantage they will start to imitate the strategic move and also diversify into product-related services. Since these competitors command similar hardware-bound resources they will be able to offer comparable product-related services. Thus, for the medium term the competitive advantage and lead over other hardware competitors will erode, due to imitation and substitution of competitors. In such a dynamic competitive environment, a competitive advantage based on existing resources will not be sustainable. Perceiving economies of scope purely from such a static

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perspective, however, ignores the potential of service diversiﬁcation for the creation of a long-term competitive advantage. Diversiﬁcation into product-related services and the continuous service delivery will have a positive impact on the ﬁrm’s existing resources, in the medium and long terms. Service delivery presupposes frequent communication and interaction with the customer. In the case of Voith, product-related service delivery (e.g., repair services, on-site maintenance of machinery, or technical consulting) requires frequent customer interaction not only of the sales force but also of technicians, engineers, and product developers. This close integration enables the mechanical engineering ﬁrm to become more sensitive to the customer’s problems since it grants deeper insights into the daily operations and processes of the customer, preferably directly at his site. At ﬁrst, this closer interaction and integration may help to improve the quality of the product-related service itself, but indirectly, it may also help to eliminate bugs and ﬂaws of the existing machinery products and thus improve the quality of the hardware offering. It might also be the case that the intensiﬁed customer dialogue helps to bring up new ideas for product innovations; especially with KIBS, customers are the most important and valuable external source of new ideas for new products (Burr & Stephan, 2006). Taken together, the mechanical engineering ﬁrm might develop a selfconception as an integrated one-stop solution provider for its customers. In summary, the close customer interaction and integration in the course of the service delivery can help to reﬁne the skills and capabilities of the ﬁrm not only for the service delivery itself but also for the traditional hardware production and development business. Fig. 3 visualizes the reﬁnement and enlargement of the traditional hardware-bound resources as a consequence of the diversiﬁcation into product-related services. The reﬁnement and enlargement of the traditional hardware-bound resources as a consequence of the diversiﬁcation into product-related services transforms the static scope effect into a dynamic scope advantage. To maintain or expand their initial competitive advantage, in the face of rivals attempting to close this gap by accumulating resources, diversiﬁers must permanently replenish and increase their resource base that underpins the advantage by creating new strategic assets and by deploying new capabilities and skills. The process of replenishing and increasing the strategic asset and knowledge base of the corporation is subject to various types of frictions. If resource accumulation processes were frictionless and pure service providers or non-service-diversiﬁed hardware ﬁrms could speed them up at little cost, then it would be difﬁcult for a service-diversiﬁed ﬁrm that gained an initial advantage with respect to a set of strategic assets, capabilities and skills

Competence-Based Strategies of Service Transition

Fig. 3.

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Dynamic Scope Effects due to Improvement and Reﬁnement of the Serviceand Hardware-Bound Resource Base.

to maintain this lead (Markides & Williamson, 1994, 1996). In practice, there are many impediments that prevent laggards from replicating or surpassing the resource positions of the leaders. Dierickx and Cool (1989) have identiﬁed four separate categories of these impediments to resource accumulation: (a) time compression diseconomies, or the extra cost associated with accumulating the required resources under time pressure; (b) mass efﬁciencies, when adding increments to an existing resource base is facilitated by possessing high levels of that stock (‘‘success breeds success’’); (c) interconnectedness of resources, when adding increments to an existing stock of resources may not just depend on the level of that stock, but also on the level of other, complementary resources; and (d) causal ambiguity, when it is impossible to fully specify which factors play a role in the process of accumulation. These impediments impose higher costs on later entrants to a product-related and hardware-integrated service business, making it more difﬁcult for them to catch up with the ﬁrst movers and established ﬁrms that have had longer time and experience to accumulate these nontradable strategic assets, skills and capabilities deployed in the diversiﬁed hardware and services business. What exactly does this mean for service diversiﬁcation? A servicediversiﬁed ﬁrm can overcome some of these frictions. A service-diversiﬁed

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ﬁrm may draw on the experiences and knowledge it has accumulated in establishing and operating its other services businesses to reduce the frictions it would otherwise face in accumulating new resources for the diversiﬁcation into new services. Such experience and knowledge refers to our notion of ‘‘competences’’ as the learning capacity of the organization. We deﬁned competences as the pool of experience and knowledge that exists elsewhere in the corporation and can be deployed to reduce the cost and time required to create new strategic assets, skills, and capabilities. A competency accumulated in one service business line acts as a catalyst in building new resources for other services. The mechanical engineering ﬁrm Voith, for example, with an established product-related service business in hardware repair and maintenance, commands a separate service unit and a specialized sales force, and has sensitized its technicians, engineers and developers for the concerns of services. The knowledge and experience of the staff also became crystallized in professional services-bound organizational structures and processes. Together, the organizational capabilities of the ﬁrm and the experience and knowledge of the staff, both in the hardware and services businesses, accumulate the competences that enable Voith to diversify into new product-related services. Starting with (simple) repair and maintenance services for its hardware products, Voith managed to quickly diversify into more sophisticated technological support and consulting services. The company now even offers customer training and delivers operation services for its customers, i.e., day-to-day running of the (Voith) machinery at customer’s site. The observation that service-diversiﬁed manufacturing ﬁrms are able to overcome the illustrated barriers easier than competitors that are not diversiﬁed into the service business is the second source of dynamic scope effects associated with (service) diversiﬁcation. Fig. 4 illustrates the use of dynamic economies of scope for the accumulation of new resources for new services businesses. The competences acquired in the traditional hardware business HBA and in the well-established product-related service businesses SBA1&2 are used for the diversiﬁcation into the new product-related service business SBA3.

2.4. From Related to Unrelated Diversiﬁcation: The Transformation of Manufacturing Firms into Service Companies In the RBV and CBV perspectives, traditional manufacturing ﬁrms can realize three different types of scope effects from diversiﬁcation into

Competence-Based Strategies of Service Transition

Fig. 4.

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Dynamic Scope Effects due to Reduced Barriers and Frictions in the Accumulation of New Resources for New Services Businesses.

product-related services. From a static view they rely on a resource exploitation strategy, i.e., economizing on existing (strategic) resource bundles (assets, skills and capabilities) of the traditional hardware businesses for the diversiﬁcation into related services (Chatterjee & Wernerfelt, 1991; Stephan, 2003; Very, 1993). The two basic requirements for this type of diversiﬁcation are – ﬁrst, that there is excess capacity and second, that the resources of the hardware business are related to the corresponding service business, i.e., the resources must be applicable without any greater adjustments or reﬁnements for the new service business (Sanchez & Heene, 2004). In a dynamic perspective, the second and third sources for scope effects describe the basis for a sustainable competitive advantage. We argued that diversiﬁcation into product-related services also improves and reﬁnes the quality of the existing hardware (and service) businesses. Services improve the skills and increase the capabilities of the ﬁrm. Furthermore, the diversiﬁcation process itself also creates a competence platform for accumulating new resources and exploring new and perhaps more sophisticated product-related services. The latter dynamic scope effect does not center on resource exploitation but rather on resource exploration.

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Resource exploration denominates the process of ﬁrms tapping into new terrains and accumulating new and increasingly unrelated resources. In the line of argumentation above, the service horizon of diversiﬁcation was bound to the hardware business of the ﬁrm. However, companies can also realize economies of scope by diversiﬁcation into new and hardwareunrelated service areas. When a ﬁrm diversiﬁes into new but still hardwarebound services it must adapt its existing resources and accumulate new ones. This adaptation and accumulation becomes manifest in learning processes within individuals and on a collective, organizational level. These competences in adapting and accumulating new resources will enable the ﬁrm over time to dissociate the services from the traditional hardware business. In the case of our mechanical engineering ﬁrm, Voith over time managed to diversify into more sophisticated service areas such as technical consulting. As a ﬁrst step, the ﬁrm decoupled the service from the ﬁxation to its own ‘‘Voith’’ machinery. As a technical consultant, the ﬁrm (‘‘Voith Consulting’’) also started to offer services for customers who do not possess and operate Voith machinery, but machines of its competitors. Voith Consulting has applied the technical skills and capabilities that it originally developed for Voith hardware also to problem solutions targeted to the hardware of competitors. The transfer of problem solutions, experience, and know-how out of its own hardware domain into the general domain of mechanical engineering increased the ﬁrm’s ﬂexibility and broadened its service horizon. The new service area of Voith became increasingly dissociated from hardware. Today, Voith Consulting offers technology consulting and support services independent of its hardware machinery business. The consulting unit has evolved to an autonomous service unit that offers consulting services for both external and internal customers. The example of the mechanical engineering ﬁrm Voith illustrates the transition from resource exploitation to resource exploration. With the consulting business, the ﬁrm has, step by step, entered the non-hardwarebound consulting business. The step from a technical consulting service provider to a pure management consulting ﬁrm with a special focus on the mechanical engineering industry might be only a minor one. A generic observation not only in mechanical engineering but also in other types of industrial KIBS is that hardware ﬁrms start with more or less simple hardware supportive services, such as maintenance and repair. They then back the service bundle with more sophisticated support services that take on a more holistic approach to the customers’ problems, such as technical

Competence-Based Strategies of Service Transition

43

consulting and training. The focus on customer-speciﬁc problems marks an important step away from mass production of standardized hardware toward services that are not targeted on the customer’s hardware products but on his value-added processes. Process supporting services comprise preventive maintenance, operation services, remote (control) services and process consulting. Customer support services are in large parts dissociated from any kind of hardware and are exclusively focused on the business of the customer. Engineering and consulting services, ﬁnancing services, requirements and market analyses, or general operator models and turnkey solutions are illustrative examples for steps into the non-hardwarebound service business that is focused on the problems and value added processes of the customer. Taken together, the service diversiﬁcation sequence can be interpreted as a trajectory that starts with the exploitation of existing resources for hardwarebound services and then, as the service horizon broadens, traverses to resource exploration for non-hardware-bound services. With the diversiﬁcation into non-hardware-bound services, ﬁrms explore and accumulate new and unrelated types of assets, skills and capabilities (for similar arguments beyond the service domain see Foss, 1993; Hagstro¨m & Chandler, 1998; Loasby, 1998; Nelson, 1991; Teece, Rumelt, Dosi, & Winter, 1994; Teece, Pisano, & Shuen, 1997). The sequence of diversiﬁcation into non-hardwarebound services is a good illustration of what is meant with dynamic capabilities and competences; especially in dynamic environments, ﬁrms must be able to constantly renew and replenish their resource base. For example, in the long run Voith may divest its hardware business and evolve into a pure service provider. Service diversiﬁcation broadens the horizon of the ﬁrm in the search for prospective growth avenues and therefore provides the basis for a sustainable competitive advantage (Sanchez et al., 1996). Finally, it must be noted that diversiﬁcation into services, and especially into non-hardware-bound services, must not necessarily result in the abandonment and divestment of the hardware business itself. The skills and capabilities that permanently arise out of the hardware business, especially from product innovations, mark an important ingredient for the successful development and rendering of industrial services. According to Cohen and Zysman (1987) , the retreat from the hardware business will eventually lead to a competence loss for the industrial services business of ﬁrms: Over time [y] ﬁrms will not be able to control what they cannot produce.

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3. THE ROLE OF SERVICES IN THE INDUSTRY LIFE CYCLE In the ﬁrst section, we have detailed out that the industrial services business is a prospective growth area, especially for ﬁrms in mature industries. In the second section, we have analyzed in great detail how industrial ﬁrms may beneﬁt from the diversiﬁcation into hardware-bound and non-hardwarebound services. In the current section, we will take a closer look at the industrial setting that surrounds diversiﬁcation into product-related services. What kind of industry context makes service diversiﬁcation a fruitful strategy? The importance of product-related services may vary over the industry life cycle: is service diversiﬁcation only advantageous in the mature phase or are there also windows of opportunity in earlier life cycle stages? In general, the industry life cycle model is an attempt to characterize an ideal evolution of an industry over time. The structural parameters of an industry, such as size, competition dynamics, number of competitors, complexity of the products, the role of innovation, the extent of the division of labor between ﬁrms, etc. vary over time (Dosi, Malerba, Marsili, & Orsenigo, 1997; Klepper, 1997; Malerba & Orsenigo, 1996). Another structural parameter of an industry, which is indeed closely linked to the division of labor between the ﬁrms, is the type and importance of product-related services. Unfortunately, the role of (product-related) services has received only little attention, both in management science and in industrial and evolutionary economics. The introduction stage of an industry’s life cycle is characterized by low market volume and a high level of uncertainty, both for ﬁrms and (potential) customers. So far, no dominant design has emerged in the industry. In the initial phase there are quite a number of competing product and process design concepts. Little is known about the new product and about what is desired by the customers. A major challenge in this early phase is therefore to understand the market demand and to break customer resistance (Hoeck, 2005). Since the competitive strategy and especially the innovation efforts are primarily product oriented, there is still a tight link between the primary product and its surrounding services. From this perspective, especially secondary services, such as information services, marketing and sales promotion, play an important role in this early life cycle stage (GraXy, 1993). Product-related services can help to reduce customer uncertainty as they arouse interest for the industry and create market transparency. For the ﬁrm, product-related services also help to identify the customers’ true problems and needs and thus devise decisive information for

Competence-Based Strategies of Service Transition

45

product development. In order to make the products ﬁt the new market, the offer of consulting and training services seems rewarding (Sanche, 2002). However, due to the tight link between the primary product and the related services, services are understood as integral part of the ﬁnal product as it is sold to the customer. Customers will not consider the services as an additional offer. Therefore the service offerings can only be partly charged, if they are brought to account at all. The companies’ add-on or give-away strategy acts as a selling instrument and therefore does not represent an additional source of income (Sanche, 2002). The emergence of a dominant design marks the beginning of the growth stage of the industry and provides the major prerequisite for the ‘‘takeoff ’’ of the market (Christensen, Sua´rez, & Utterback, 1998). In the course of the growth stage, product differentiation plays an important role, which at ﬁrst is achieved by product innovation. However, as the rate of product innovation decreases because production processes become more reﬁned and specialized machinery is used, the critical differentiation and success factors shift over time toward process innovation and product quality (Utterback & Abernathy, 1975). Following this line of reasoning, the company has to provide offers that secure and improve product quality. Since customers usually still do not differentiate between the product and the service provided, a lack in services will have a negative impact on the whole product offer. It thus seems meaningful to predominantly use the product-related services to improve the customer– supplier relationship. So-called ‘‘distinguishing’’ services, e.g., production optimization, test production, service hotlines, and customer care, prove to be suitable (Speth, 2001). In the growth stage, the offer of related services promises primarily a differentiation potential. The product is still in the foreground and services are primarily used to support the market penetration of the primary product range. Product-related services act as differentiation premium. Similar to the initial stage of the industry’s life cycle, services act as a differentiation and selling argument that can only be charged partly, if at all. However, the integrated offer of product and customer-tailored services may justify a price premium over competitors. In the mature stage, the market and output growth slows down as the limit of technical opportunities for product and process innovations is reached (Klepper, 1997). Due to declining technological differentiation possibilities, industrial services fundamentally gain in importance compared to the previous stages (Speth, 2001). Also with regard to the increase in competition, customer commitment becomes even more relevant. In this

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TIM KESSLER AND MICHAEL STEPHAN

mature stage, no sustainable competitive advantage can be achieved with the isolated offer of the primary product (Sanche, 2002). While services were closely bound to the product, both in the initial and in the growth stage, they now become more independent and decoupled from the primary offer. Therefore, the potential to market and offer the services independently from the product increases. In consequence, it is no longer sufﬁcient to provide standard services such as maintenance, consulting or requirement analyses. The way toward a future-oriented and autonomous service offer has to be paved. In this context, remote services, the buildoperate-transfer (BOT) model, personnel services, and also ﬁnancial services have to be considered. Services of this kind offer ‘‘real’’ differentiation potential and long-term advantages in the mature industry setting. Admittedly, to build up such services requires commitment and great expenses (Speth, 2001). However, with regard to the quality of the resource base of incumbent manufacturing ﬁrms, diversiﬁcation efforts into more sophisticated and/or less hardware-bound services should fall on a fertile ground; in the mature stage ﬁrms usually command all the strategic assets, skills and capabilities that have been discussed in the preceding sections and which provide the basis to successfully diversify into services – the longstanding core business know-how can be extended to the service sector (Zook, 2007). Toward the end of the life cycle – in the decline stage – the aggregate sales volume drops, the industry’s relevant market is shrinking. As the rivalry between competitors heats up, the entry rate becomes negative and the number of competitors decreases. Now, the establishment of services becomes a strategic imperative for the incumbents (Zook, 2007). In this stage, the external pressure to diversify from hardware-bound into autonomous services areas increases (To¨pfer, 1996). Product-related services such as constant maintenance, comprehensive training, modernization and upgrading prolong the life cycle of the primary product. Beyond the prolongation of the life cycle of the primary product, product-unrelated services immunize the company against the structural decline in the core business. To sum up, management in the declining stage becomes increasingly service focused. This shift in focus is triggered by the fact that the service business is more proﬁtable than the original core business in the declining stage (Gottfredson, Schaubert, & Saenz, 2008; Gadiesh & Gilbert, 1998). Appropriate cost accounting and result accounting structure should be established in order to be able to make precise statements about proﬁtability. Fig. 5 summarizes our proposed service transition model over the industry life cycle.

47

Competence-Based Strategies of Service Transition

information and sales promotion

differentiation

profit, differentiation and development of new business areas

diversification, establishment of (new) service business areas and markets

product related and hardwarebound secondary services

distinguishing services (production optimization, service hotlines, test production, etc.)

increasingly independent and unrelated services (remote services, BOT model, fin. services, etc.)

non-hardwarebound and unrelated services

t Introduction

Growth

Maturity

Decline

Fig. 5. The Role and Kind of Services in Different Stages of the Industry Life Cycle.

4. SERVICE TRANSITION IN THE GERMAN MECHANICAL ENGINEERING INDUSTRY The German mechanical engineering association (VDMA) recently announced that the orders received in the German mechanical engineering industry increased by 10 percent compared to the last year (Wiechers, 2008). Due to lively demand, the German mechanical engineering industry reached revenues of about h 190 billion in 2007 (VDMA, 2008). With its 6,000, mainly small- and medium-sized ﬁrms and about 914,000 employees, the mechanical engineering industry is one of Germany’s most important industrial goods sector, right after the automotive and electrical engineering sectors. According to ofﬁcial statements, the service proportion has been rising constantly in the industry. However, there are no concrete ﬁgures that precisely quantify the service intensity in terms of revenues or employees. The reasons for this vague picture must be located on two different levels. First, the collection of statistical data concerning the exact service proportion of the revenues of diversiﬁed industrial ﬁrms entails many methodological and conceptual problems. These problems negatively distort the picture of the micro- and macroeconomic relevance of services, both within macroeconomic and sector-speciﬁc national and supra-national statistics. Second, ﬁrms are not obliged to publish ﬁnancial data about their service activities in the ﬁnancial reports. Even public stock corporations are

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not obliged to do so. Sometimes they report on their service activities on a voluntary basis, usually in the segment reporting of their annual reports. However, the data at hand lacks in accuracy and is inconsistent over time (Kessler & Stephan, 2008; Mo¨dinger & Redling, 2004; Opfermann, 2004; Pilat & Wo¨lﬂ, 2005). In the subsequent empirical study of the German mechanical engineering industry, we take a snapshot of the current status and service relevance in twelve ﬁrms. The data and information are based on semi-structured depth interviews with company executives and insights from the analysis of the annual reports of the respective companies. The sample ﬁrms are operating in different subsectors of the mechanical engineering industry, namely in food processing and packaging machinery, in propulsion technology, robotics, and printing and paper technology. As all of the sample ﬁrms have their traditional roots in hardware manufacturing, we will analyze the sequence of diversiﬁcation steps into services in more detail. Will the empirical study conﬁrm our theoretical reﬂections and proposition about the sequence from hardware-bound steps into non-hardware-bound unrelated services? To what extent have the diversiﬁcation steps into services required a shift in the underlying resource base of the ﬁrms? Does hardware-bound service diversiﬁcation go along with resource exploitation? And does the diversiﬁcation into non-hardware-bound services really require the exploration of new resources and competences? A recent survey conducted by the VDMA gives an initial overview of the importance of different types of service in the industry. As can be seen in Fig. 6, traditional hardware-bound services, namely spare parts, installation and maintenance still account for the largest percentage of the service revenues. Three of our sample ﬁrms are operating in the food processing and packing machinery sector. With a production volume of h 10.6 billion, 650 enterprises and about 60,000 employees the food processing and packing machinery industry is one of the largest subsectors of the German mechanical engineering industry (VDMA, 2008). Krones AG is the world market leader in beverage and packing technology. Revenues accounted for h 2,156 million in 2007. Due to the increasing relevance of (related) services, the company enlarged its service offer in the after-sales business, which is already more proﬁtable than the traditional core business. Krones provides a product life cycle-oriented fullservice offer which is organized in an own business division called Life Cycle Services (LCS). With 1,100 of its total 9,500 employees being employed in the services business, the company commands a considerable amount of servicespeciﬁc resources and plans to further develop its service competences.

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Competence-Based Strategies of Service Transition

Others Leasing, Financing

0.3%

Disposal

0.3%

Consulting Training Second Hand Machines BOT Model Remote Service Maintenance Contracts Maintenance Installation Spare Parts

Fig. 6.

3.2%

1.4% 2.0% 1.3% 0.4% 1.2% 5.9% 15.9% 17.3% 50.1%

Percentage of Sales by Type of Service in Mechanical Engineering. Source: VDMA (2002).

The service spectrum offered by the company is quite diverse and includes productivity optimization, maintenance, training, remote services, packaging design studies, spare parts, retroﬁtting (upgrading), and reselling. Krones does not publish any ﬁnancial information on its service operations. In contrast to Krones, Koch Abfu¨ll- und Verpackungstechnik is a niche player in the industry. The company supplies the food and dairy industry with packaging machines. According to the company, customers in the food processing industry do not buy machines but rather their use, i.e., the services of the machines. Consequently, hardware-related services are of strategic relevance of the company. Services are offered along the whole product life cycle and include engineering and development, maintenance and repair, reconstruction and modernization, production optimization and analysis, spare parts, and maintenance contracts. The company provides its service range since its early beginnings and since then has developed a great competence base. Because customer demand has changed over the life cycle, the company has put an even greater focus on services. At Koch, the service business is organized in an own service segment, which accounts for 40 percent of the total revenues. Tetra Pak Processing GmbH is a German subsidiary of Tetra Pak. With 20,250 employees and revenues of h 8,533 million in 2007, Tetra Pak is the only provider of integrated foods processing, packaging and distribution systems. According to Tetra Pak, besides innovative technology the major success factors in the business are plant availability, longevity, and

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customer-optimized production. In order to meet these criteria, the company has centered management attention on services. However, in contrast to the management statements, the service offer of Tetra Pak entails only the average spectrum of hardware-bound services. The services provided by Tetra Pak include concept development and system design, installation, training, spare parts, maintenance, upgrading and production optimization. Like Krones, Tetra Pak does not report any ﬁnancial information about its services operations. Three other companies of our sample – A. Friedrich Flender AG, SEW-EURODRIVE and Baumu¨ller Nu¨rnberg GmbH – are major competitors in the propulsion technology industry. Propulsion technology manufacturers usually act as suppliers for other engineering industries. Propulsion technology products range from simple elements over components and modular subsystems to complete aggregates and systems that are in the machines of many other industries. In 2006, the German propulsion technology sector had a sales volume of h 13.3 billion and 76,600 employees. A. Friedrich Flender AG (Flender) is one of the leading producers of components for the mechanical and electrical propulsion technology. The product range contains single components as well as complete propulsion systems. In 2005 the company had 6,700 employees and generated revenues of h 1,226 million. In its business, Flender has made the experience that maintenance contracts and rapidly available spare parts will signiﬁcantly increase systems reliability. In order to fulﬁll customer requests, the company bundled its service competences in an own service division. Founded in 1990, FLENDER Service GmbH has access to the groups’ know-how and resources and has developed its own engineering and processing competences. Besides technical services, FLENDER Service GmbH offers a rather standard service package including maintenance, monitoring, hotline, spare parts and project management and planning. Working in a mature market, Flender does not market the services together with the product. However, customers are not always willing to pay for additional services, so (related) services do eventually lead to additional proﬁts. The company does not disclose its service revenues. Established in 1931, SEW-EURODRIVE today has 12,000 employees and revenues of about h 1.8 billion. The company is one of the market leaders in propulsion automation products. According to SEW-EURODRIVE, products in the market have become increasingly standardized, so services are the major differentiating factor in competition. Organized in a separate business unit, the company has so-called service competence centers that provide a quite comprehensive service range. Besides spare parts, a service

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51

hotline, and maintenance, these service competence centers offer training, condition monitoring, consulting, modernization, maintenance management, and application programming. Especially with the software related application programming, it becomes obvious that the company developed skills and capabilities that go beyond the traditional hardware-bound service business. The company does not disclose any ﬁnancial details about its service operations. With its 1,900 employees, Baumu¨ller Nu¨rnberg GmbH produces electrical propulsion systems and generates a sales volume of about h 200 million. The service business is managed independently by the subsidiary Baumu¨ller Reparaturwerk GmbH & Co. KG. The company considers this separated organizational solution as important, since services are a major growth area which should be operated as individual proﬁt centers. The services offered by Baumu¨ller comprise engineering, assembly and installation, maintenance, retroﬁtting, spare parts, disposal, training and remote monitoring. The company also provides most of its services for the machines of other competitors, which clearly demonstrates that Baumu¨ller has developed the competence to apply its service skills and knowledge also beyond its own product range. This marks a ﬁrst step in becoming a pure service provider. However, the company does not disclose its service revenues. The printing and paper technology sector includes machines for the paper production and processing and printing machinery of all kind. Again, three ﬁrms of our sample – WinklerþDu¨nnebier AG, Ko¨nig & Bauer Group and MAN Roland Druckmaschinen AG – are operating in this segment. The sales volume of the sector reached h 8.8 billion in 2007 which accounts for 20 percent of the world market. The sector is dominated by the companies Heidelberger Druckmaschinen, MAN Roland, and Koenig & Bauer which together have a market share of about 70 percent. WinklerþDu¨nnebier AG (WþD) manufactures specialized machinery for the production of envelopes and tissues and holds about two thirds of the world market in this niche. WþD employs 765 people and had revenues of h 90.6 million in 2007. The company divides its services into four groups: technical service, business service, technical improvement program and spare parts. These four groups include maintenance, remote diagnosis and control, a telephone hotline, maintenance, online spare parts ordering, ﬁnancial services (external, in cooperation with banks), engineering, retroﬁtting and upgrading, testing, and training. In 2007, the company generated between 36 and 40 percent of its total revenues with services, of which 90 percent have been billed separately. Their service-to-totaloperations ratio (STO ratio) has been increasing steadily over the past

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TIM KESSLER AND MICHAEL STEPHAN

years. However, the majority of the service revenues still accrue in traditional hardware-bound segments; the spare parts business alone stands for more than 50 percent of the revenues. The Ko¨nig & Bauer Group (KBA) is one of the largest press manufacturers and has the broadest press range in the industry. The company’s product range includes machines for newspaper printing, offset printing, and digital offset. By the end of 2007, the company had 8,250 employees and revenues of h 1,703 million. The broad product range indicates KBA’s competences in fulﬁlling individual customer needs and its unique know-how in various areas of printing technology that can be transferred to other application areas. The KBA service offer is manifold: the ﬁrm provides a 24/7 hotline service, spare parts (also online), maintenance, retroﬁtting and upgrading, machine removal, individual maintenance and full-service contracts, consulting and general technical support, remote diagnosis, and training. The service activities are growing rapidly. Within the past eight years KBA doubled its service offers and revenues. In 2007 services accounted for about 20 to 25 percent of the ﬁrm’s total revenues. More than half of these revenues were billed separately. However, also with KBA the spare parts business stands for more than 50 percent of the service revenues. MAN Roland Druckmaschinen AG employs 8,726 people and had revenues of h 1,936 million in 2007. The company’s major competence is the design and production of printing systems for publishing and printing ﬁrms. MAN Roland supports its customers with integrated services along the whole machinery life cycle. The ﬁrm offers process analysis and optimization services, consulting, investment planning, engineering and design of production systems, layout planning, ﬁnancial services and insurances, full-service contracts, maintenance, project management, the BOT model, machine removals, training, remote services, and upgrading. Out of its total sales, MAN Roland generates about 15 percent with services. It is estimated that from the total services sales about 60 percent are strictly hardwarebound, whereas 40 percent mark autonomous service offers, either for competitor’s hardware products or for other engineering-related applications beyond the printing machinery business. Finally, the robotics sector is the fourth and last segment of our empirical study of the mechanical engineering industry. The sample ﬁrms KUKA Roboter GmbH, AseaBrownBoveri (ABB) Ltd and FANUC Robotics Deutschland GmbH are major competitors in this ﬁeld. The robotics sector is a rather new segment in the mechanical engineering industry that deals with the controlling and development of production robots. The major customer of the German robotics sector has traditionally been the

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53

automotive industry which accounts for about 54 percent of total industry sales. Due to this mono-customer structure, robotic ﬁrms now try to enlarge their customer spectrum and diversify into other manufacturing industries. In total, the German robotics sector generated sales of h 2.1 billion in the ﬁscal year 2007. With revenues of h 413 million and 2,023 people employed, KUKA Roboter GmbH is one of the leading manufacturers of industrial robots. The products are used for material processing, loading and packing, palletizing, and spot-welding. KUKA’s service offers include hardwarebound and non-hardware-bound services. The ﬁrm offers a broad services spectrum including engineering and consulting services, ofﬂine simulation, project management, software applications, robot programming, production optimization, training, technical support (24/7 hotline), maintenance, remote diagnosis, spare parts, upgrading, and retroﬁtting. Since 2001, the services are managed in a separate service department. KUKA generates between 20 and 25 percent of its total revenues with services, though, most of it with spare parts. A remarkable percentage of 90 is billed separately. Headquartered in Zurich/Switzerland, ABB Ltd is a diversiﬁed energy and automation technology group with total revenues of h 19.8 billion in 2007. Approximately, the robotics division accounted for four percent of the total revenues, which totals to h 952 million. The robotics division employs about 4,900 people in about 100 countries. ABB is one of the leading providers of industrial robots; robotic software are modular production cells. ABB’s service and support area is divided into process and application consulting, training, and maintenance. In detail these subareas include planning and consulting, productivity analysis, project management, retroﬁtting and modernization, real-time data collection and analysis, production optimization, full-service contracts, second-hand robots, training, documentation, maintenance and technical support, spare parts (also online), and remote services. According to company information, ABB will further develop its service competences and shift toward more active and new services. Services account for 20% of the total revenues. Most of the services are charged separately. FANUC Robotics Deutschland GmbH is a subsidiary of the Japanese FANUC Ltd. In 2007 the company had revenues of h 2.2 billion, but in Germany it is a mere sales and service company. The products are manufactured in Japan and the United States. The company provides industrial robots, single components, and integrated process solutions. The robots can be used for all kinds of applications, from assembly to welding. FANUC Robotics provides primarily hardware-bound services such as a

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24/7 hotline, remote diagnosis, individual maintenance contracts, repair, robot programming, retroﬁtting, production optimization, spare parts, and training. In 2007, the service proportion was 18 percent of total revenues. FANUC Robotics Deutschland plans to increase this proportion to 25 percent over the next years. Table 1 provides an overview of the 12 engineering companies in the four different sectors of the German mechanical engineering industry. The empirical study clearly exempliﬁes that all 12 sample ﬁrms, which operate in different sectors of the engineering industry, apply their existing skills and knowledge base from traditional hardware manufacturing for the service transition. In every single case, the sample ﬁrms have increased their services efforts over the last decade. With regard to the types of services offered, the variety is rather limited. Although the examined industry Survey of the Presented Companies.

Table 1. Subsector

Food processing and packing machinery

Propulsion technology

Printing and paper technology

Robotics

Company

Revenues (in million euros)

Service Ratio %

Service Organization

2,156

n.a.

n.a.

40

Independent business division Own service segment

8,533

n.a.

No independent business division

Flender AG SEW-EURODRIVE

1,226 1,800

n.a. n.a.

Baumu¨ller Nu¨rnberg GmbH

200

n.a.

Own subsidiary Independent business division Own subsidiary

Ko¨nig & Bauer AG

1,703

20–25

MAN Roland

1,936

15

WinklerþDu¨nnebier AG

90.6

36–40

Kuka Roboter GmbH

413

20–25

19,800

20

n.a.

18

Krones AG Koch Abfu¨ll- und Verpackungstechnik Tetra Pak Processing GmbH

ABB Ltd FANUC Robotics Deutschland GmbH

Independent business division Independent business division No independent business division Independent business division Independent business division Independent business division

Competence-Based Strategies of Service Transition

55

segments within mechanical engineering are very heterogeneous, the service spectrum of the companies is quite homogeneous. Basically all companies offer 24/7 hotline services, consulting, maintenance, spare parts, training, etc. Yet, it can also be observed that each company offers one or two services (in a way) that provide the basis for differentiation. Obviously the ﬁrms have realized that the service offer helps them to stand out in competition, as products become standardized. The services that serve as the basis for differentiation of the product offer are largely hardware bound. With regard to the organizational implementation of the service business and the establishment of organizational competences it is quite obvious that the majority of the sample ﬁrms, including the smaller ones, made considerable efforts. Most of the ﬁrms established separate organizational units for rendering the service. With regard to the service accounting, most of the sample ﬁrms have switched over to charge the provided services separately in order to be able to make additional proﬁts. Together, this illustrates that the companies began to understand that the exploration of organizational and technical competences and skills is essential for a successful service transition (Bjurklo et al., 2009; Young, 2008). To sum it up, we can conclude that (related) services play an increasingly important role within the (German) mechanical engineering industry. Companies have started with traditional hardware-bound services and later on use additional more sophisticated services as a means for differentiation in competition. In a few cases, the ﬁrms already stepped into non-hardwarebound business. What remains unclear and irritating is the fact that only 7 out of the 12 sample companies report about the ﬁnancial relevance of their service business. On the one hand, this can be explained with segmentspeciﬁc factors such as oligopolistic reaction and nondisclosure (e.g., in the food processing and packaging machinery sector and in propulsion technology). On the other hand, this may also indicate that the companies not yet have implemented a fully functioning internal service-oriented reporting system, which not only serves as a prerequisite for external reporting but also for the fortiﬁcation of the service business.

5. CONCLUSION: TRANSFORMATION TRAJECTORY FROM HARDWARE MANUFACTURERS TO SERVICE PROVIDERS In our contribution titled ‘‘Competence-based strategies of service transition’’ we have constructed a conceptual framework for analyzing and

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explaining the advantages of the diversiﬁcation strategy into services. In the beginning we have identiﬁed the service business as a major avenue of growth for manufacturing ﬁrms. With diversiﬁcation into services, industrial ﬁrms explore new sources for growth, even in markets that, due to their maturity, do not pledge great expansion potential. Beyond the growth potential, service diversiﬁcation also tends to have a positive performance impact. We applied market- and resource-based arguments to substantiate the positive growth and performance effect of services. In the main part of the paper we have dealt with the issue of economies of scope of service diversiﬁcation, i.e., the types of advantages that industrial ﬁrms can realize over pure service providers (or nondiversiﬁed industrial ﬁrms) when they diversify into (product-related) services. In this context, we have explored the question as to what extent the theoretical insights about product diversiﬁcation strategies from the physical goods sector can be transferred to the service sector. We came to the conclusion that only some of the arguments are transferable. Due to the constitutive characteristics and idiosyncrasies of services, namely intangibility, perishability and the integration of the external factor (simultaneity), traditional neoclassical arguments for related diversiﬁcation cannot be transferred to service diversiﬁcation. Furthermore, the inherent static nature of the neoclassical argumentation on scope economies prevents the explanation of a sustainable competitive advantage. In contrast to the neoclassical view of scope economies, we have adopted a dynamic perspective that rather focuses on immaterial factors in order to explain long-term advantages of diversiﬁcation. For the explanation of service diversiﬁcation, elements of the resource-based and competencebased views were introduced. In the RBV and CBV perspectives, traditional manufacturing ﬁrms can realize three different types of scope effects from diversiﬁcation into product-related services. From a static view they rely on a resource exploitation strategy, i.e., economizing on existing (strategic) resource bundles (assets, skills and capabilities) of the traditional hardware businesses for the diversiﬁcation into related services. The two basic requirements for this type of diversiﬁcation are – ﬁrst, that there is excess capacity and second, that the resources of the hardware business are related to the corresponding service business, i.e., the resources must be applicable without any greater adjustment or reﬁnements for the new service business. In a dynamic perspective, the second source and third source of scope effects mark the basis for a sustainable competitive advantage. We have detailed out that diversiﬁcation into product-related services also improves and reﬁnes the quality and innovativeness of the existing hardware (and service)

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business. Services enlarge the skills and capabilities of the ﬁrm. Beyond this issue, the process of diversiﬁcation also creates a competence platform for accumulating new resources and exploring new and more sophisticated product-related services. Especially the latter dynamic scope effect does not center on resource exploitation but rather on resource exploration. Resource exploration denominates the process of ﬁrms tapping into new terrains and accumulating new and increasingly unrelated resources. All in all, our model of diversiﬁcation into (related) services describes a service diversiﬁcation trajectory. Diversiﬁcation steps of manufacturing ﬁrms into services can be interpreted as a sequence that starts with the exploitation of existing resources for hardware-bound services. The ﬁrm starts with traditional services which are closely linked to the hardware, such as repair, spare parts or maintenance. As their service horizon broadens, ﬁrms start to offer more sophisticated but still hardware-bound services: services bound to their own hardware but also to the products of competitors. In the long run, this diversiﬁcation turns from being pure resource exploitation into resource exploration for non-hardware-bound services. With the diversiﬁcation into non-hardware-bound services, ﬁrms explore and accumulate new and unrelated types of assets, skills and capabilities. However, we clearly pointed out that the transformation into a pure service provider should not eventually lead to the complete divestment of the hardware business. Complementing the RBV and CBV analyses of diversiﬁcation, we took a closer look at the industrial setting which surrounds the diversiﬁcation steps into product-related services. To ﬁnd answers for the question when service diversiﬁcation is fruitful, we have applied the industry life cycle concept. The ﬁndings suggest that the diversiﬁcation trajectory stemming from our RBV-based diversiﬁcation considerations neatly coincides with the ideal evolution of an industry along its entire life cycle. In the initial stage of the life cycle ﬁrms start with the offer of secondary hardware-bound services. As the industry grows, hardware-bound services become important to differentiate the product offers from competitors. Over time these hardwarebound services become more sophisticated and as the industry’s hardware business matures the service offers turn from hardware-bound into nonhardware-bound services. In summary, both theoretical conceptions – the RBV and the industry life cycle view complement each other and lead to the proposition of the described service diversiﬁcation trajectory. Finally, in our explorative empirical study we have analyzed the service offers and strategies of 12 German ﬁrms from four subsectors of the mechanical engineering industry. Basically, the ﬁndings support our

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theoretical considerations. However, it became clear that only a few companies really have managed to diversify into more sophisticated hardware-bound and or even non-hardware-bound services. The empirical study has also revealed some shortcomings of our conceptual framework. The empirical ﬁndings clearly indicate that the diversiﬁcation into services and the establishment of a proﬁtable service business also requires adequate organizational structures. To simply add the services business to the existing organization like an appendix will not be enough, especially as the service business gains in relevance. An appropriate organizational setting also requires adequate internal accounting and reporting systems. Without internal ﬁnancial transparency, the service business will not gain enough recognition and top management support. Future research on service diversiﬁcation should therefore also address the issue of organizational capabilities that manufacturing ﬁrms must develop to provide a fertile ground for the service business.

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ENHANCING THE INFLOW OF KNOWLEDGE: ELABORATING THE ABSORPTIVE CAPACITY CYCLE IN SMES Roberto Filippini, Wolfgang H. Gu¨ttel and Anna Nosella ABSTRACT Small- and medium-sized enterprises (SMEs) often do not have slack resources with which to develop internally a broad spectrum of capabilities and to observe in depth the ﬁrm’s environment. Therefore, they need to carefully develop abilities to absorb knowledge from outside the ﬁrm’s boundaries so as to have access to cutting-edge knowledge in spite of limited resources. One strategy is to establish knowledge management (KM) projects for this purpose. In this paper, we describe how KM projects and subsequently emerging KM routines in SMEs facilitate the enhancement of the ﬁrm’s absorptive capacity (AC; i.e., the ability to recognize, capture, and assimilate external knowledge). Our results indicate the importance of recognizing potential knowledge providers prior to any absorption of knowledge from external sources. Furthermore, we emphasize the relevance of routines for absorbing knowledge and we distinguish between KM routines that are deliberately developed for Enhancing Competences for Competitive Advantage Advances in Applied Business Strategy, Volume 12, 63–86 Copyright r 2010 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1108/S0749-6826(2010)0000012006

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absorbing knowledge and KM projects where knowledge absorption happens unconsciously. Finally, we point out that different stages of an AC process follow different logics (exploration vs. exploitation) and, thus, a skilful management of the AC cycle is necessary to leverage externally absorbed knowledge.

1. INTRODUCTION In any organization, increasing market globalization, competitive pressure, and the reduced amount of time for product development make it more and more important to improve and innovate continuously in order to gain and sustain competitive advantage. This need is particularly acute in small- and medium-sized enterprises (SMEs) where the lack of resources – human, ﬁnancial, time, etc. – and capabilities make leverage of external partners key in order to gain access to cutting-edge knowledge. Competitive pressure on SMEs is often similar to pressure experienced by bigger companies, but in SMEs, resources, capabilities, and related options to gain new information and knowledge from outside are scarce. One difﬁcult task faced by SMEs is to establish networks to potential knowledge providers and to absorb knowledge from external sources and thus keep pace with environmental dynamics (Muscio, 2007; Liao, Welsch, & Stoica, 2003; Valkokari & Helander, 2007). The concept of absorptive capacity (AC) was initially developed by Cohen and Levinthal (1990) and recently discussed and adjusted by Zahra and George (2002), Lane, Koka, and Pathak (2006), and Todorova and Durisin (2007). The main idea is that organizations need to develop an AC to identify external knowledge, to capture it, and to use it for internal purposes. Muscio (2007) and Jones and Craven (2001) demonstrated how important AC and external collaborations are for SMEs in gaining access to knowledge outside the ﬁrm and leveraging it internally. The ability of ﬁrms to recognize opportunities (sensing) and then to seize them for further developing the capability base and for dynamically adapting to changing market conditions is also investigated in the research on dynamic capabilities by Tripsas (1997), Zahra and George (2002), Wang and Ahmed (2007), and Teece (2007). However, research on the entire absorption process and on AC in the context of dynamic capabilities is scarce (Wang & Ahmed, 2007, p. 38). We ﬁll this gap by focusing on a particular aspect of the topic related to the way SMEs recognize, capture, and absorb knowledge from external actors. In this paper, we do not focus on the SMEs’ AC, but

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on knowledge management (KM) projects and subsequently emerging KM routines that are directed at creating new knowledge and/or to subsequently transferring the newly generated knowledge within the ﬁrm. Therefore, we pose the following research question: How do KM projects in SMEs contribute to advancing the ﬁrm’s AC, i.e., the organization’s capabilities with regard to recognizing, capturing, and assimilating new knowledge from the external environment? Our paper makes three contributions to literature. First, we indicate the importance of recognizing potential knowledge providers prior to any absorption of knowledge. Second, we emphasize the role of routines for absorbing knowledge from external sources. Third, we discuss the different learning logics (exploration vs. exploitation) resulting from recognizing, capturing, and assimilating, as well as the strategies implemented by SMEs to manage this AC cycle. The paper is structured as follows. In the next section, we analyze the state-of-the-ﬁeld in AC research by drawing attention to the speciﬁc situation of SMEs. After describing our methods, we present our case study results. In the subsequent section, we discuss our results and draw conclusions to the existing research in the ﬁeld of AC.

2. ABSORPTIVE CAPACITY IN SMES: STATE OF THE FIELD Cohen and Levinthal (1990, p. 128) deﬁne AC as ‘‘an ability to recognize the value of new information, assimilate it, and apply it to commercial ends.’’ They perceive outside sources of knowledge as being critical to innovation processes (Cohen & Levinthal, 1989, 1990) and discuss the role of ﬁrms in sensing external knowledge and in seizing it for internal purposes. In particular, Cohen and Levinthal (1990) emphasize the role of previous, related knowledge that is necessary at individual and at organizational level for absorbing knowledge from the ﬁrm’s environment. Therefore, research on AC ﬁts in with the emerging knowledge-based theory of the ﬁrm (Kogut & Zander, 1992; Grant, 1996; Nonaka, Toyama, & Nagata, 2000), where knowledge is perceived as the foundation for gaining competitive advantage, and learning prepares the ground for achieving and sustaining an advantageous market position. Following the seminal contribution of Cohen and Levinthal (1989, 1990) and Zahra and George (2002) reconceptualized the AC construct and linked

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this issue to the dynamic capabilities approach more broadly than Tripsas (1997) with her focus on dynamic technical capabilities. Zahra and George (2002) distinguish between potential and realized AC. They argued that ﬁrms focusing on the acquisition of new external knowledge are able to constantly renew their knowledge base (potential AC) but they suffer from the costs of acquisition if they are not able to subsequently exploit this newly acquired knowledge (realized AC). Nevertheless, both types of AC are necessary for adapting to a dynamic environment. Therefore, Zahra and George (2002) address the distinction between exploration and exploitation (March, 1991; Levinthal & March, 1993; Gupta, Smith, & Shalley, 2006) as well as between sensing and seizing (O’Reilly & Tushman, 2008; Teece, 2007) in order to emphasize that a ﬁrm needs to strive for a balance of both (Tushman & O’Reilly, 1996; Raisch & Birkinshaw, 2008). Firms need to develop the ability to sense opportunities and threats and, subsequently, to seize them in order to reconﬁgure their knowledge base, as proposed in the dynamic capabilities approach (Savory, 2006; Teece, 2007; Wang & Ahmed, 2007). Todorova and Durisin (2007) distinguish between four components of AC: recognition of the value of knowledge, acquisition, assimilation (or transformation), and exploitation. In the recognition stage, they emphasize that prior knowledge is necessary to recognize and to evaluate the potential use and value of external knowledge. The ﬁrm’s knowledge base sets the potential but also the value limitations of knowledge from outside the ﬁrm’s boundaries. Subsequently, ﬁrms acquire knowledge; the newly acquired knowledge can either be integrated into the existing knowledge base, or stimulates its transformation in order to enable an accommodation of new knowledge. According to Lane et al. (2006, p. 856) Absorptive capacity is a ﬁrm’s ability to utilize externally held knowledge through three sequential processes: (1) recognizing and understanding potentially valuable new knowledge outside the ﬁrm through exploratory learning, (2) assimilating valuable new knowledge through transformative learning, and (3) using the assimilated knowledge to create new knowledge and commercial output through exploitative learning.

Based on these considerations, we deﬁne AC as a ﬁrm’s ability to develop an AC for recognizing and understanding, capturing, and assimilating new knowledge. Recognition and understanding refers to the ability to identify knowledge gaps, necessary knowledge, and know-how suppliers. Firms need to be able to make such knowledge available (capturing) and to transform the newly acquired knowledge for internal purposes in order to apply it (assimilation). Lane et al. (2006) emphasize that ﬁrms absorb different

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types of knowledge. They elucidated in their literature review that the higher the complexity of absorbed knowledge the more important is tacit knowledge (know-how) compared to codiﬁed knowledge (know-what). ‘‘Simpler knowledge is easier to absorb than complex knowledge’’ (Lane et al., 2006, p. 846). Empirical research on AC primarily discusses the role of knowledge transfer with regard to the advancement of the ﬁrm’s technology. Based on a study of 122 best-practice transfers, Szulanski (1996) identiﬁed a lack of AC as a major barrier to internal knowledge transfer. Jansen, Van Den Bosch, and Volberda (2005) distinguished between potential and realized AC. Their quantitative empirical results indicate that organizational structures, such as cross-functional interfaces, participation in decision making and job rotation, enhance a unit’s potential AC. The unit’s realized AC is associated with connectedness and socialization tactics. However, they also propose a negative relationship between AC and organizational routines as routinization limits the ﬁrm’s scope and thus the organization’s AC. This result undermines the argument within the dynamic capabilities approach, where routine-based dynamic capabilities serve as a suitable mechanism for absorbing strategically valuable knowledge from external sources. Hongwu (2008) identiﬁed empirically a positive relationship between a ﬁrm’s AC to enhance knowledge transfer and technology sourcing modes. Soo, Devinney, and Midgley (2007) indicate that creativity and the ﬁrm’s subsequent learning behavior with regard to the absorption of knowledge is necessary in order to leverage AC in problem-solving activities. In the context of alliances, Mowery, Oxley, and Silverman (1996) emphasized the role of AC in acquiring capabilities. These researchers’ empirical results showed that experience in related technological areas between both alliance partners facilitates the ﬁrm’s ability to absorb knowledge from the respected alliance partner. The role of AC in R&D cooperation was also empirically analyzed by Kastelli, Caloghirou, and Loannides (2004). They identiﬁed that the ﬁrm’s AC is the key enabler for the use of external knowledge from R&D alliances. Based on a sample of 2,464 innovative ﬁrms, Fosfuri and Tribo´ (2008) showed that ﬁrms which are involved in R&D collaborations develop a stronger ability to absorb knowledge and, as a result, experience with knowledge search is a key antecedent of AC. Therefore, the researchers emphasize the path-dependent nature of AC. Experience also plays a vital role in the arguments of Bergh and Lim (2008) who in a quantitative study investigated the restructuring behavior of 205 ﬁrms and found out that cumulative and repetitive experience with sell-offs was related to the adoption of an ensuing sell-off

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and to higher performance. Lane and Lubatkin (1998) found out that similarities (e.g., concerning their partner’s basic knowledge, degree of formalization, research centralization, compensation practices, and research communities) between alliance partners positively inﬂuence the ﬁrms’ AC. Tripsas (1997) accomplished case studies on how ﬁrms survive radical technological changes. She found out that external integrative capabilities and geographically distributed research sites contribute to necessary dynamic technical capabilities. Internal investments in R&D, which develop AC, and an external communication infrastructure facilitate the transmission of external knowledge, i.e., they identify and integrate knowledge from outside the ﬁrm’s boundaries. Soosay and Hyland (2008) present a case study in which they show that the dynamic capability of absorbing knowledge can foster greater leverage of exploration potential which leads to radical innovation and reconﬁguration of exploitable knowledge for incremental improvements. Based on a quantitative study, Tsai (2001) demonstrates that AC, in terms of R&D investment, signiﬁcantly affects business units’ innovation, as well as their performance. In a similar vein, Nicholls-Nixon and Woo (2003) conducted a longitudinal quantitative study of 26 biotech ﬁrms and found out that the ability to generate novelties in a regime of technological change involves both internal and external R&D investment, as well as involvement in a variety of equity and nonequity alliances. The importance of integrating knowledge leverage activities into the scientiﬁc community for acquiring cutting-edge knowledge for the business environment was also found in the case studies of Verona and Ravasi (2003) and Gu¨ttel and Konlechner (2009). A handful of papers investigate the development of a ﬁrm’s AC by going beyond mere consideration of the investment in R&D (Lane et al., 2006). Lenox and King (2004) analyzed the managerial strategies for developing AC, which is built on prior knowledge and experience. Their quantitative study showed that managers can directly affect the ﬁrm’s AC by giving information to potential adopters within the organization. However, Lenox and King (2004) also highlighted the role of prior experience that cannot be fully replaced by information provision. Firms can also acquire necessary knowledge via specialist knowledge providers. Tether and Tajar (2008) discovered that ﬁrms with open approaches to innovation, with high levels of AC and with greater social capital and networking capabilities are more likely to engage such knowledge providers. These ﬁrms use specialized knowledge providers to complement the ﬁrm’s own internal innovation activities. Hitherto, very few studies have discussed the role of AC in SMEs. Muscio (2007) presented survey data of 276 SMEs and showed that the SME’s AC

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has a relevant impact on the ability of ﬁrms to establish collaborations with external organizations (e.g., universities and technology transfer centers). More generally, Valkokari and Helander (2007) perceive strategic cooperation and networks in their theoretical paper as a means that enable SMEs to compete in dynamic business environments. They distinguish between traditional supply networks, enhancing networks (with the purpose of problem solving), and innovation networks. Jones and Craven (2001) identiﬁed in a case study the role of boundary spanners and the development of speciﬁc routines (e.g., for new product development) that facilitate the ﬁrm’s ability to extract knowledge from outside the company. Based on a case study research strategy in SMEs, Salvato, Lassini, and Wiklund (2007) identiﬁed three steps to create acquisition AC. After the ﬁrms created acquisition knowledge, they systematically accumulate experience by developing organizational routines and managerial practices. In the ﬁnal step, they create structures and practices to recall experience. Barrett and Sexton (2006) identiﬁed in seven case studies that innovation behavior in SMEs is closely linked to operational activities, because resources are very scarce. The SMEs tend to take up established technologies, which is also a result of the style of decision making where owners dominate decisions whether new opportunities are seized or not. In conclusion, there is some theoretical and empirical advancement in the ﬁeld of AC. However, the development of AC is only addressed by few studies and often it is assumed that investments in R&D broaden the ﬁrm’s AC (Lane et al., 2006). Furthermore, the role of AC as routines in the context of a ﬁrm’s dynamic capabilities is rarely addressed, though it is perceived as a major component of dynamic capabilities to recognize systematically opportunities or threats and to seize them in order to advance the ﬁrm’s knowledge base. Finally, we lack knowledge on the role of AC in SMEs, as only a few studies have hitherto investigated this issue. We seek to ﬁll this research gap by analyzing KM projects in SMEs. KM projects can address various topics that are connected to the existence or development of a ﬁrm’s AC. Accordingly, KM projects can be established to develop routines that allow a ﬁrm to systematically analyze the ﬁrm’s environment (e.g., competitor behavior, customer demands, and technological trends). Such KM projects support the recognition of valuable external information. Another group of KM projects can be initiated to stimulate the generation of innovations in regard to product offerings, as well as to change structures or processes in order to increase efﬁciency or effectiveness. KM projects are perceived as a set of aims, rules, and

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guidelines that are introduced by a ﬁrm in order to structure the practices of knowledge managers. Thus, the KM project builds the cornerstone for the development of KM practices that are based on speciﬁc routines aiming at knowledge absorption, innovation, and knowledge transfer.

3. METHODS We took a case study approach (Yin, 2003) for analyzing the use of KM projects in SMEs for recognizing, capturing, and assimilating external knowledge for internal purposes. This study aimed at theory development (Eisenhardt & Graebner, 2007) because we perceive a lack of integrative understanding of AC. We studied institutionalized (e.g., in terms of clear procedures, participants, and objectives) KM initiatives that were established with different intentions, such as knowledge transfer, structured problem solving (optimization), knowledge acquisition from customers, or external experts. As every ﬁrm has at its disposal, concurrently, several external relationships which could potentially serve as know-how sources, we selected for our analysis one speciﬁc KM project that facilitates the recognition and/or capturing and/or assimilation of external knowledge, on the basis of which we identiﬁed similarities and differences in the KM project-speciﬁc ACs’ characteristics. Table 1 provides information about the companies and the KM projects analyzed. The case study research strategy was based on interviews and on an analysis of reports and documents (Yin, 2003; Creswell, 2007). Face-to-face interviews with key actors in each ﬁrm were carried out by several members Table 1. Companies Industry Annual turnover Company age No. of employees KM project focus a

Carr

Characteristics of Firms and KM Projectsa. Cy-North

Green1

Liberty Wines

NBG

RSI

Refrigeration ICT h75 million h3 million

Solar-energy h73 million

Food h10 million

Consulting h5 million

Food h 150 million

38 years 650

20 years 31

19 years 234

59 years 100

25 years 13

152 years 150

Knowledge transfer

Optimization Knowledge transfer

We use ﬁctional names for the ﬁrms.

Knowledge Knowledge Customer acquisition acquisition Feedback

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of the research team in order to gather information about the company’s history and, in particular, about the KM projects’ development and current characteristics of the KM practices. The interpretation of the data was based on the framework of Becker (2004, 2005) for analyzing routines and observable practices. Based on his (2005, pp. 819–823) methodological reasoning, we dismantled the KM project and routines in detailed microactivities. We extended Becker’s considerations by combining two approaches for the re-construction of routines. First, we drew on the analysis of formal rules that are embedded in standard operating procedures, in ICT systems, or in the formal structure of the project. Second, we tried to identify recurrent patterns of action (informal work practices) in order to identify the social rules, which guide the KM behavior of employees. The ﬁrst thing we asked our interviewees to do was to give us a short description of the company and the most important challenges they have to face. We then focused on the KM projects and practices, in order to identify both the history and the main characteristics in terms of the usage of ICT tools and of the social practices implemented. Further, we analyzed reports and documents, as well as exemplary applications of the KM practices in terms of project-speciﬁc descriptions and records. The interviews were conducted between 2005 and 2008, following a longitudinal approach that is needed to analyze the development of the KM projects and subsequently emerging KM practices. The ﬁrst sets of interviews were carried out in November 2005. Two subsequent follow-up interview stages took place between 2006 and 2008, to collect further data about the evolution of the projects and practices, as well as on the results obtained. These semi-structured interviews with managers and employees lasted approximately 90–120 min. We additionally used workshops and participant observation for data collection. After we transcribed the recorded interviews, we discussed our preliminary ﬁndings with interviewees for veriﬁcation, both personally and in workshops. Subsequently, we adapted our case study reports in the light of any additional information obtained. This process of interaction provided an opportunity to validate our ﬁndings. Thus, we improved the validity of our case studies continuously, according to Yin’s (2003, pp. 33–39) suggestions. Responses from the interviews were used to develop a case study database that included tables to record data. These tables were helpful in guaranteeing that the data collected were based on the research questions, and that the same information was available for all cases.

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4. CASE STUDY RESULTS: KM PROJECT AS A MEANS TO FACILITATE AC In the following section we present our case study results. After a short description of the ﬁrm and the KM project, we present our analysis of how the KM project and the emerging KM practices facilitate different aspects of AC: recognition, capturing (acquisition), assimilation, and the management of the complete AC cycle. Subsequently, we accomplish a cross-case analysis, in order to generalize from individual cases. 4.1. Case Study Descriptions 4.1.1. The AC Cycle at Carr The main business of Carr, a ﬁrm in the refrigeration industry, is the implementation of large air conditioning systems with very elaborate control software. The initial idea at Carr for establishing an ICT-based KM project, called knowledge sharing area (KSA), was the result of an endeavor to facilitate knowledge transfer between internal software developers. Over the course of time, KM practices were developed in order to allow Carr to integrate network partners (beta-testers) to test and to further develop software for controlling the air condition systems, and to make the novelties accessible to Carr. Additionally, Carr enables their clients to make suggestions for new software development activities in a pre-deﬁned ICT space. Carr uses a software tool to structure the inﬂow of newly developed software components and to collect incoming new ideas. Carr is able to use advanced software solutions provided by their clients quickly; i.e., they are easily absorbed by the software development department. However, capturing completely new ideas from their clients is difﬁcult, as there are no templates available for systematizing these ideas (Table 2). 4.1.2. The AC Cycle at Cy-North Cy-North is a small, but innovative and entrepreneur-driven ﬁrm that provides software solutions. They implemented a KM project called ‘‘Kaizen weeks’’ (KW). The core idea of the methodology is to increase efﬁciency in operative business processes. In Cy-North, KW is essentially organized as a project, where a team of approximately three employees has the objective of solving a clearly deﬁned problem (ranging from business process reengineering to innovation) within one week on a full time basis. Cy-North uses one to ﬁve KWs in parallel at each event with an average of

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Table 2. Recognition

Capturing Assimilation AC cycle management

Capturing

Assimilation

AC cycle management

AC Cycle at Carr.

Internally established routines where clients can send novel software solutions and make suggestions for improvements; limited recognition capacity as the space for search is predeﬁned by ICT tool. Established routines make it possible to treat external knowledge as internal. Test routines of internal software designers to evaluate the appropriateness of externally suggested improvements and novelties. Self-organizing AC cycle management as internally established routines are enlarged for integrating external clients; focus on a limited fragment for capturing knowledge as the space for providing new ideas is limited.

Table 3. Recognition

73

AC Cycle at Cy-North.

Established practice to use ties with universities for gaining access to novel solutions. Pressure on project team to develop new solutions facilitates the use of external problem-solving ideas; established routines for problem solving by which new knowledge can be processed internally. Solutions that are based on newly acquired knowledge are presented to the top management and to all employees routinely in interim and ﬁnal presentations. Project team and the formal structure for Kaizen weeks serve as a means to recognize, capture, and assimilate new knowledge.

three events a year. The execution of every KW follows a deﬁned and stable procedure. The KW teams work usually 12–14 h a day and they regularly report their progress and results to the top management. During the execution of the KW, the teams resume social ties with universities in order to extract knowledge for solving speciﬁed problems. The reestablishment of these ties facilitates the absorption of external knowledge and its immediate application at Cy-North. On the last day, the teams present their results to the top management team and to all other employees in a formal session, which stimulates visibility and knowledge transfer to the staff (Table 3).

4.1.3. The AC Cycle at Green1 Green1 is a medium-sized company in solar-tech industry. Their innovation process is subdivided into two parts. In the ﬁrst part, the ﬁrm tries to ﬁnd new ideas (e.g., technologies, solutions for customers) by using multiple sources of information (customers, R&D alliance partners, competitors, and

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Table 4. Recognition Capturing

Assimilation AC cycle management

AC Cycle at Green1.

High sensitivity to external information resulting from different sources; broad spectrum for potential information inﬂow. Detailed procedure at the beginning of the second stage of the innovation process for formally evaluating the potential of the external generated knowledge; these routines facilitate the discussion on new ideas, but they run the risk of excluding promising ideas too early. Detailed routines govern the way how new knowledge is transformed into new products or used for an optimization of the production process. Two different stages, which are not easily managed, characterize the AC cycle: exploratory search and subsequent exploitative innovation generation; top management attention supports the integration of the two different process stages.

to the political system) in a loosely structured way. The second part of the innovation process was optimized by the use of a KM project. A detailed procedure deﬁnes steps, methods, and roles for completing the innovation process (tight structure). They use a formalized procedure to continuously evaluate selected novel ideas and to decide on the funding of the implementation process (Table 4). 4.1.4. The AC Cycle at Liberty Wines Liberty Wines is a winery in an underdeveloped wine-growing area that uses intensively a variety of partners for developing their wines and their marketing strategy. The KM project at Liberty Wines is dedicated to establish ties with different experts (universities and research institutes) in order to extract knowledge from outside. The cooperation is based on formal contracts. Nevertheless, it is a climate of trust and clear responsibilities, which is the foundation of the collaboration’s success, that makes learning possible. Liberty Wines uses a team approach to cooperate with external knowledge providers. They found project teams where employees intensively work together with external experts. At Liberty Wines, the R&D department and the top management are responsible for absorbing the newly acquired knowledge and for implementing (or revising) the suggestions from external experts (Table 5). 4.1.5. The AC Cycle at NBG NBG is a small-sized consulting ﬁrm. The main objective of the KM practice, called ‘‘innovation center,’’ is to identify new opportunities for the development of their consulting methods. Therefore, NBG regularly conduct

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Table 5. Recognition

Capturing Assimilation

AC cycle management

75

AC Cycle at Liberty Wines.

Long and stable ties with some experts and their deep integration into operative processes create awareness of external developments; employees in the R&D department have a similar professional background as the external experts have. Teamwork facilitates capturing knowledge from external partners with elaborated expertise; top management attention to seize external ideas. Network-orientated culture and teamwork lead to the identiﬁcation and the use of external information; preemptive acceptance of external suggestions facilitates implementation. R&D unit and top management attention keep the AC cycle together; network-orientated culture and established routines for absorbing knowledge from outside.

two-day workshops approximately twice a year. They invite academics from different research ﬁelds and clients who possess a diverse background, with the aim of identifying future trends for their consulting business. After a workshop is completed, NBG consultants evaluate the results in an internal workshop and try to capture interesting aspects for subsequent development of consulting products. A few months later, they usually accomplish another workshop on the same topic. They invite a new mix of participants, but a core group of three to four practitioners and two to three consultants remain. At the beginning of the new workshop, the consultants present parts of their reﬂection and they discuss various (and new) facets of the selected topic with the new group of participants. Then another phase of reﬂection and discussion within the consulting ﬁrm follows. Frequently, the workshop series on a particular topic ends up with the publication of a book as a trigger to codify knowledge and to support canvassing activities for the newly developed consulting product (Table 6). 4.1.6. The AC Cycle at RSI RSI is a ﬁrm operating in the food industry. After completing internal new product development activities, RSI tested their innovations under real market conditions in cooperation with one large supermarket chain. They set up a KM project where the interaction between RSI and the supermarket chain serves as a means to receive qualitative and quantitative data with regard to customer behavior. The results of the trial period were easily channeled into RSI’s knowledge base via a series of workshops at which the consequences of the data gathered in cooperation with the supermarket chain were discussed (Table 7).

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Table 6. Recognition

Capturing

Assimilation

AC cycle management

AC Cycle at NBG.

Routines to integrate experts and clients with regard to valuation of future trends (knowledge); workshop series enables a ‘‘principle of dialog’’ for evaluating whether or not the received knowledge is understood correctly (‘‘active listening’’). Routines to discuss the received knowledge internally in a series of internal meetings; established formal frame in terms of a ‘‘research group’’ who is responsible for storing (capturing) the externally generated knowledge. Routines to embed knowledge generated by the use of this KM practice in consulting products; continuous internal discussion of received knowledge and within the workshops to broaden the understanding of new information; codiﬁcation in terms of a book as a formal completion of a workshop series on a certain topic, and to offer a newly developed consulting method. Continuous interplay between exploratory stages (workshops with academics and clients) and internal meetings (exploitation), in order to discuss the results, serves as a means to keep the whole process integrated; a stable core team of two to three consultants govern the process.

Table 7.

AC Cycle at RSI.

Recognition

Established routines to extract knowledge from the trials at the supermarket chain; the scope for search is predeﬁned on a small-scale test ﬁeld. Capturing Routines for analyzing the data internally in a workshop design; cooperation between R&D unit, marketing/sales and top management for drawing conclusions out of the externally gathered data. Assimilation Integration of different departments in the data analyzing process facilitates the subsequent use of novel information; innovation-driven culture enables the use of new information for innovation processes. AC Cycle Self-organizing AC cycle management are performed regularly as established Management routines to analyze the data and to draw conclusions; focus on a limited fragment for capturing knowledge as the quantity and quality of the data is predeﬁned.

4.2. Cross-Case Analysis 4.2.1. AC and the Role of KM Projects The focus of the KM projects ranges from knowledge acquisition (in the cases of Liberty Wines, NBG, RSI) to internal knowledge transfer (CyNorth, Green1, and Carr). Liberty Wines, RSI, and NBG explicitly established KM projects for gaining information from experts and clients. Cy-North, Green1, and Carr tried to enhance their internal knowledge transfer in order to leverage existing knowledge more effectively. With

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regard to Liberty Wines, RSI, and NBG, the explicit intention to capture knowledge from outside shapes the routines and practices throughout different stages of recognition, capturing, and assimilation in all three ﬁrms. There is a constant ﬂow of knowledge from the external environment as ﬁrms follow internal practices, which allow newly recognized knowledge to be grasped. In contrast, Cy-North, Green1, and Carr, use the KM project in a structured way only in domains of capturing and assimilation but abandon it when it comes to systematically monitoring the ﬁrm’s environment. Another difference among the six KM projects emerges concerning the type of knowledge they seek to absorb. In contrast to the primary focus of the AC concept on technological knowledge, in our case studies, only one ﬁrm (Liberty Wines) explicitly uses KM projects to absorb this kind of knowledge. In the cases of Cy-North and Carr, knowledge on technologies also plays a vital role but the ﬁrms also pay attention to knowledge on markets and customers. The other three ﬁrms (RSI, NBG, Green1) are primarily interested in gaining knowledge from customers. 4.2.2. AC: Recognition Strategies Comparing these cases reveals two distinct processes: establishing access to knowledge bases outside the ﬁrm and the absorption process itself. In the ﬁrst stage, ﬁrms recognize potential knowledge providers and establish loose or tight ties with them. In a second stage, they observe deliberately, or unconsciously, regularly, or spontaneously, the potential knowledge providers in order to identify valuable knowledge. These types of collaborations serve as a means for knowledge acquisition. We identiﬁed two types of collaborations. On the one hand, Liberty Wines, NBG, CyNorth, and RSI identiﬁed experts as potentially valuable knowledge providers and they strengthened their ties with them. On the other hand, customers are also perceived as sources of new ideas, as is the case at Carr, NBG, and Green1. Experts are identiﬁed for having access to cutting-edge knowledge or specialized information, whereas customers provide valuable market-knowledge in terms of new ideas, expectations, and the competitive situation. Interestingly, we do not identify any relationship between the form of collaboration and the degree of the knowledge’s complexity. In Liberty Wines, the close relationship between experts and employees facilitate the transfer of complex knowledge, as we expected. However, at RSI and Carr, a long-lasting relationship is necessary to increase trust between the ﬁrms, even if the transferred knowledge is of low complexity. On the contrary, NGB and Green1 use sophisticated methods to integrate

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customers and experts into their KM projects, which are aimed at creating access to their knowledge bases. These methods serve as a functional equivalent to a long-lasting collaboration because the development of a common frame of reference between knowledge provider and knowledge receiver is enhanced. A common frame of reference without a close collaboration functions also as a knowledge-bridge between employees at Cy-North and researchers at the university, where most of Cy-North’s employees completed their studies. RSI, NBG, and Carr possess routines that enable ﬁrms to recognize knowledge systematically in the ﬁrms’ environment in a pre-deﬁned mode. The organizational foundation of these routines are legal contracts (RSI), ICT tools for an easy transmission of new knowledge from clients to the ﬁrm (Carr), or social structures (workshops) that function as a means to integrate external experts and customers in a structured way (NBG). However, we observed that in cases where the communication channels between knowledge providers and knowledge receivers are narrowly structured, ﬁrms run the risk of excluding valuable knowledge from outside that does not ﬁt these transmission channels (RSI, Carr). To avoid such difﬁculties, Green1 and Liberty Wines use multiple channels to identify valuable external knowledge. A speciﬁc form of evaluating the value of external knowledge is developed by NBG. They use a series of workshops to gain external information, to discuss it internally, and to present the results of the internal discussion to the external participants in the next workshop. Thus, they receive feedback from outside on their reﬂections about the value of the information they gained in a previous workshop. Another way of estimating the value of external information emerges from using employees with a similar frame of reference compared to the external knowledge providers’ frame of reference, which is the case at Liberty Wines, Cy-North, and Carr. Cy-North uses the established social ties with universities, where most of the employees completed their studies, to extract valuable information free of charge. Likewise, long-lasting relations between knowledge providers such as experts (Liberty Wines) and lead users (Carr) and knowledge receivers characterize their social relationship and serve as a means for the development of a similar frame of reference that guides the valuation of knowledge. 4.2.3. AC: Capturing Strategies In all cases we found that ﬁrms establish organizational routines in order to process and leverage received information. NBG conducts internal workshops for discussing ideas, suggestions, and observations submitted by

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clients in the previous workshop. RSI likewise interprets the data of client preferences received via the supermarket chain in a series of workshops where members from different departments participate. Green1 deﬁnes a formal procedure as to how project teams should discuss and evaluate external information. Carr does not distinguish between internal or external information that is fed into the ICT systems. They use the same routines to deal with new information provided either by internal software developers or from their external clients. Cy-North also uses established routines in their problem-solving activities to capture useful information from internal or external sources. Finally, Liberty Wines cooperates intensively with external experts (consultants and academics) and has implemented several routines that govern their cooperation. However, the routines in turn deﬁne expectations on the characteristics of information and, therefore, ﬁlter out knowledge that does not ﬁt.

4.2.4. AC: Assimilation Strategies In all cases, assimilation strategies are based on routines that are developed in the course of the KM project. In NBG, RSI, and Green1, knowledge that is regarded as valuable and captured by the organization in a routinized way and is subsequently assimilated as the KM project is part of the entire new product development process. Liberty Wines, Cy-North, Carr, and also Green1 embed new knowledge in problem-solving activities to advance processes, technologies, and practices. At Liberty Wines and RSI the foundation of routines are formal contracts, while at Carr and RSI, in addition to the formal contract, a software solution functions as a guideline for knowledge acquisition. Methods based on formal descriptions are used at Cy-North, NGB, and Green1 to govern the KM routines, and, thus, the acquisition of new knowledge. Therefore, we ﬁnd a formal web of rules that can be activated to perform routines for absorbing knowledge from outside. Formal procedures (e.g., investment planning) and workshops are predeﬁned for transforming new knowledge into products and optimization projects. Captured knowledge is routinely transformed into innovations or enters into optimization activities as long as an immediate utilization is perceived. The other side of the same coin (routine) is characterized by ﬁltering out knowledge that has no immediate use. Consequently, ﬁrms tend to emphasize in their assimilation strategies through the use of KM routines exploitative innovations (i.e., preferring new knowledge that is close to the shape of the existing knowledge base) rather than exploratory innovations (i.e., radical innovations that are based on completely new knowledge).

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4.2.5. AC: Strategies for Managing the AC Cycle We distinguish three strategies for managing the AC cycle. First, an integrative strategy is performed by NBG and Liberty Wines, where a continuous interplay between knowledge provider and knowledge receiver is enabled. Both ﬁrms use a stable team as an interface to the external environment. Furthermore, top management attention is high, as members of the top management team are integrated into the entire process. Second, the different components of AC can be structurally divided, as it is the case at Green1, RSI, and Carr. In these ﬁrms, the process of recognition is distinct from capturing and assimilation activities. Ideas and data are gathered in a pre-deﬁned structure from partners (RSI) or delivered by clients (Carr). One department collects the data and in a subsequent separate process another group of employees analyzes them. Third, another form of absorbing knowledge from outside is performed by Cy-North. They only temporarily perform the KM routine through which they use their ties with external knowledge providers (universities). However, they use an integrated routine in these cases, including top management attention and the use of a project team.

5. DISCUSSION AND CONCLUSION KM projects contribute to the advancement of the ﬁrm’s AC. As resources are scarce in SMEs, one KM project can initiate the development of KM practices for acquiring knowledge or for transferring knowledge in a systematic manner, where otherwise in larger companies investment in the R&D department are perceived as the common mode for increasing AC (Tripsas, 1997; Tsai, 2001; Nicholls-Nixon & Woo, 2003). Table 8 gives an overview of our ﬁndings and serves as transition to our contributions. The foundation of the collaboration in the context of KM projects, which also serves as a means for absorbing knowledge from external knowledge providers, ranges from a tight relationship, based on long-lasting cooperation, to loose ties with clients or experts who provide information infrequently. Trust between knowledge provider and knowledge receiver sometimes plays a critical role. Long-lasting relationships can be characterized as trustful. In other situations, where a trustful relationship is necessary to transfer complex knowledge, the KM routine makes a method available (e.g., a workshop design) where knowledge receiver and knowledge provider interact intensively that facilitates an increase of trust. The KM routine’s method serves also as facilitating force for transferring

Explicit and codiﬁed knowledge; low complexity Tightly related to existing software solutions ICT-based Capturing: Integration of new software solutions into existing one

Type of knowledge

Relationship to existing knowledge base AC-mode Dominant AC stage

Loose but longlasting clients (trustful)

Foundation of collaboration

Carr

Loose and relationship depends on topic Explicit knowledge; medium complexity Tightly related as questions to experts are predeﬁned Social Assimilation: Integration of new knowledge into problemsolving solution and presentations

Cy-North

Table 8.

Social Recognition: Identiﬁcation of new ideas from various sources

Loose and tight relationship depending on the content Social Capturing: Integration of new suggestions and recommendations from experts

Tight: Formal contract and longlasting relationship to experts Explicit and tacit knowledge; high complexity

Loose: Changing clients

Explicit knowledge; medium complexity Loose and tight relationship feasible

Liberty Wines

Green1

AC in SMEs: An Overview.

Social Capturing: Collective sense-making of acquired knowledge during workshop series

Tight and long lasting (trustful)

Loose: Changing participants (clients and experts) Tacit at the beginning; joint codiﬁcation; high complexity Loosely related at the beginning

Tightly related as data results from test trials of products ICT-based Capturing: Interpretation of data during workshop sessions

Explicit knowledge; low complexity

RSI

NGB

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complex knowledge, as the content as well as the background knowledge have to be transmitted in order that ﬁrm members understand the meaning in an interactive process of collective sense-making. The use of a sophisticated method can be omitted in those cases where a common frame of reference between knowledge provider and knowledge receiver function as a basis for interpretation and understanding of medium or complex knowledge. Our case studies also show that the relationship between the absorbed knowledge to the existing knowledge base can be either loose or tight. In the latter case, the receiving ﬁrm often predeﬁnes criteria which knowledge is expected, whereby the search scope is limited. KM routines that use an ICT infrastructure as their core method channel the absorbed knowledge directly into the existing knowledge base, where a social foundation of the KM routines implies a higher degree of openness for novelties. Finally, we found out that the case study ﬁrms differ in their emphasis at a certain AC stage, but the capturing stage is the most important; this is the phase between the recognition of valuable knowledge and the assimilation into the existing organization: the point of time where potential AC passes over into realized AC.

5.1. Recognition of Knowledge Providers and Different Types of Knowledge The distinction between potential and realized AC also refers to a recognition of the social structure underlying the absorption of knowledge. Therefore, we endorse the studies of Tether and Tajar (2008) and Muscio (2007) who emphasize the role of knowledge providers for receiving valuable knowledge. They propose a higher degree for AC makes the ﬁnding of knowledge providers more likely. Our case studies indicate that the establishment of a social network, either through a long-lasting relationship or by using a method in the KM routines that facilitates the development of a trustful environment, is a prerequisite for absorbing knowledge from an external environment. On the one hand, SMEs use KM projects to integrate external partners on a formal contractual basis for providing essential information that is not accessible inside the ﬁrm. On the other hand, SMEs establish KM projects that only provide an informal framework for leveraging ties with external knowledge providers. Furthermore, our results show that SMEs not only absorb technological knowledge, as it is commonly perceived in AC literature (Cohen & Levinthal, 1990; Tripsas, 1997;

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Hongwu, 2008), but also identify new market trends and changes in the customer behavior as it is assumed by discussing the role of AC in the dynamic capabilities approach (Verona & Ravasi, 2003; Teece, 2007).

5.2. Routinized Absorption of Knowledge KM projects enable the establishment of routines for capturing and assimilating newly acquired knowledge (Jones & Craven, 2001; Salvato et al., 2007). We can therefore perceive AC as a dynamic capability because the processes are routinized, i.e., they follow a learned and stable pattern (Zollo & Winter, 2002). Our cases demonstrate that, these routines facilitate the absorption of new knowledge. We therefore put forward a counterargument to Jansen’s et al. (2005) ﬁnding that routines harm the absorption of knowledge. In our complex analysis of the case studies, we identiﬁed the KM routines as a double-edged sword, but also with positive consequences with regard to the absorption of knowledge. On the one hand, routines function as a stabilizing force for absorbing knowledge from external sources. They increase predictability and provide a mode how the transfer of new knowledge and ideas can happen. On the other hand, and in keeping with the research by Jansen et al. (2005), routines limit the search scope for identifying new knowledge. Consequently, routines reduce the potential AC by restricting the search scope, but increase the realized AC by stabilizing the assimilation of new knowledge. We also found evidence for Barrett and Sexton’s (2006) concern that such routines in SMEs are more dedicated to exploitation than to exploration. Therefore, knowledge that is outside the ﬁrm’s frame of reference will not be integrated into the organization, as the probability is high that capturing and assimilating routines will ﬁlter it out.

5.3. Skilful Management of the AC Cycle Our empirical ﬁndings also indicate that the vital task of SMEs is to skillfully manage the AC cycle, which consists of recognizing, capturing, and assimilating new knowledge. Recognition, capturing, and assimilation follow different logics and require diverse structural and cultural solutions as assumed by Zahra and George (2002) and Lane et al. (2006). While recognition of threats (knowledge gaps) and opportunities (new knowledge and knowledge providers) demand openness in the search process, capturing calls upon a ﬁrm’s ability to make a clear selection. In the ﬁnal stage,

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assimilation, the ﬁt of the captured knowledge to the ﬁrm’s frame of reference and to existing routines, is important with regard to the organization’s ability to leverage knowledge. All three aspects of AC are necessary to gain information from the external environment and to use it internally. However, as these stages follow the different learning logics of exploration (recognition) and exploitation (capturing and assimilation), ﬁrms have to deal with resulting contradictions as proposed by exploration/ exploitation research (March, 1991; Gupta et al., 2006). Based on our research, we identiﬁed three modes how ﬁrms balance exploration and exploitation in their activities of absorbing knowledge from external sources in the course of KM initiatives. They can perform an integrative AC strategy for managing the AC cycle where all three stages are performed (in parallel) by the same group of employees who alternate between exploration and exploitation. A structured AC strategy results in a clear separation of parallel AC processes to different departments where the top management team or a project team seeks to integrate results along the AC process. A temporal AC strategy implies the enactment of different AC routines in the course of the KM initiative separately and sequentially. The structural and temporal distinction makes the processing of the three AC stages (recognizing, capturing, and assimilation) easier but the integration of results more difﬁcult than in an integrative AC strategy as the same group of employees is responsible for all AC activities within a KM initiative. However, in any case, ﬁrms need to develop mechanisms to deal with contradictions resulting from the continuous performance of the entire AC cycle as they fully beneﬁt from the inﬂow of knowledge only if the are able to manage the ﬂow of knowledge across all AC stages.

REFERENCES Barrett, P., & Sexton, M. (2006). Innovation in small, project-based construction ﬁrms. British Journal of Management, 17(4), 331–346. Becker, M. C. (2004). Organizational routines: A review of the literature. Industrial and Corporate Change, 13(4), 643–677. Becker, M. C. (2005). A framework for applying organizational routines in empirical research: Linking antecedents, characteristics and performance outcomes of recurrent interaction patterns. Industrial and Corporate Change, 14(5), 817–846. Bergh, D. D., & Lim, E. N.-K. (2008). Learning how to restructure: Absorptive capacity and improvisational views of restructuring actions and performance. Strategic Management Journal, 29(6), 593–616.

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Nonaka, I., Toyama, R., & Nagata, A. (2000). A ﬁrm as a knowledge-creating entity: A new perspective on the theory of the ﬁrm. Industrial and Corporate Change, 9(1), 1–20. O’Reilly, C. A., III., & Tushman, M. (2008). Ambidexterity as a dynamic capability: Resolving the innovator’s dilemma. Research in Organizational Behavior, 28, 185–206. Raisch, S., & Birkinshaw, J. (2008). Organizational ambidexterity: Antecedents, outcomes, and moderators. Journal of Management, 34, 375–409. Salvato, C., Lassini, U., & Wiklund, J. (2007). Dynamics of external growth in SMEs: A process model of acquisition capabilities emergence. Schmalenbach Business Review, 59(3), 282–305. Savory, C. (2006). Translating knowledge to build technological competence. Management Decision, 44(8), 1052–1075. Soo, C. W., Devinney, T. M., & Midgley, D. F. (2007). External knowledge acquisition, creativity and learning in organisational problem solving. International Journal of Technology Management, 38(1/2), 137–159. Soosay, C., & Hyland, P. (2008). Exploration and exploitation: The interplay between knowledge and continuous innovation. International Journal of Technology Management, 42(1/2), 20–35. Szulanski, G. (1996). Exploring internal stickiness: Impediments to the transfer of best practice within the ﬁrm. Strategic Management Journal, 17, 27–43. Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), 1319–1350. Tether, B. S., & Tajar, A. (2008). Beyond industry-university links: Sourcing knowledge for innovation from consultants, private research organisations and the public science-base. Research Policy, 37(6/7), 1079–1095. Todorova, G., & Durisin, B. (2007). Absorptive capacity: Valuing a reconceptualization. Academy of Management Review, 32(3), 774–786. Tripsas, M. (1997). Surviving radical technological change through dynamic capability: Evidence from the typesetter industry. Industrial and Corporate Change, 6(2), 341–377. Tsai, W. (2001). Knowledge transfer in interorganizational networks: Effects of network position and absorptive capacity on business unit innovation and performance. Academy of Management Journal, 44(5), 996–1004. Tushman, M. L., & O’Reilly, C. A., III. (1996). Ambidextrous organizations: Managing evolutionary and revolutionary change. California Management Review, 38(4), 8–30. Valkokari, K., & Helander, N. (2007). Knowledge management in different types of strategic SME networks. Management Research News, 30(8), 597–608. Verona, G., & Ravasi, D. (2003). Unbundling dynamic capabilities: An exploratory study of continuous product innovation. Industrial and Corporate Change, 12(3), 577–606. Wang, C. L., & Ahmed, P. K. (2007). Dynamic capabilities: A review and research agenda. International Journal of Management Reviews, 9(1), 31–51. Yin, R. K. (2003). Case study research: Design and methods (3rd ed.). Thousand Oaks: Sage. Zahra, S. A., & George, G. (2002). Absorptive capacity: A review, reconceptualization, and extension. Academy of Management Review, 27(2), 185–203. Zollo, M., & Winter, S. G. (2002). Deliberate learning and the evolution of dynamic capabilities. Organization Science, 13(3), 339–351.

TOYOTA’S COMPETITIVE ADVANTAGE: PATH DEPENDENCY, DYNAMIC CAPABILITIES, AND SOURCES OF INIMITABILITY – A CONTRASTIVE STUDY WITH NISSAN Evelyn Anderson ABSTRACT Journal articles and books on Toyota’s competitive advantage abound. More recent analyses tended to focus on Toyota alone (Coriat, 2000; Liker, 2004) while earlier literature examined the competitive advantage of the Japanese automobile industry as a whole (Asanuma, 1989; Womack, Jones, & Roos, 1990; Fruin, 1992; Dyer, 1994, 1996a, 1996b). Intensive analysis on the Toyota Production System (TPS) notwithstanding, what exactly constitutes the system’s inimitability remains elusive. This paper contributes to existing literature by examining how a post-war industrial policy might have given rise to Toyota and Nissan adopting two different strategic logics (or governance structures) as each had a unique set of resources and competences. Different governance structures however, did not appear to contribute to inter-ﬁrm performance Enhancing Competences for Competitive Advantage Advances in Applied Business Strategy, Volume 12, 87–120 Copyright r 2010 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1108/S0749-6826(2010)0000012007

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variance between the two competitors for at least 15 years. What then could be the source of Toyota’s competitive advantage and its inimitability? This paper unravels how causal ambiguity might have confounded Nissan, Toyota’s only signiﬁcant domestic rival for the second half of the last century.

INTRODUCTION For half a century since the end of World War II, two auto assemblers fought relentlessly for the top position in Japan’s automobile industry. Both assemblers – Toyota and Nissan – were perceived to have similar governance structure based on relation-speciﬁc contracts with a large network of components (keiretsu)1 suppliers (Asanuma, 1992, p. 102). Both had similar market shares and operating proﬁt well into the 1970s. By the 1990s however, Nissan and many of its keiretsu members were saddled in bad debt. Nissan abandoned its keiretsu network in 1999 under the ﬁrm’s ﬁrst ever foreign chief operating ofﬁcer (Ghosn, 2002, p. 39, 2005, p. 109). An organizational structure that was once considered a source of competitive advantage for the whole Japanese auto industry was no more for Nissan. How could similar (keiretsu or inter-ﬁrm) governance within the same industry be the source of competitive advantage for one ﬁrm (Toyota), yet the cause of ﬁnancial demise for another (Nissan)? This paper documents the evolution of the Toyota and Nissan core keiretsu, with a focus on the differences between the two. It explores the nature of Toyota’s inimitability in the context of path dependency, causal ambiguity and the development of competences.

THE JAPANESE AUTOMOBILE INDUSTRY IN THE EARLY POST-WAR YEARS Up until the early 1950s, motor vehicle manufacturers such as Toyota and Nissan conducted business with suppliers in ways that were very similar to American practice (Cusumano, 1985, p. 377). Industry statistics (Table 1) indicate that Toyota internalized 82% of its production in 1951. Toyota had the highest in-house production ratio of 82% among the car assemblers at the time. The equivalent ratio for Nissan was 71% and 69% for Isuzu (Nihon Jidousha Kaigisho, 1955, pp. 81–82). The Toyota in-house

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Table 1.

In-house (%) Outsourcing (%)

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Toyota Shifting to Outsourcing 1951–1954. 1951

1952

1953

1954

82 18

76 24

78 22

71 29

Source: Nihon Jidousha Kaigisho (1955, pp. 81–82).

production ratio declined to 71% in 1954, and eventually to 30% by 1959 (Daiyamondosha, 1959, p. 292). This shift in strategic direction seemed to coincide with government policy changes that culminated in the enactment of The Provisional Act for the Promotion of the Machinery Industry 1956– 1970 (to be abbreviated as The Provisional Act in subsequent references). The changes that prompted the legislation of this industrial policy ﬁrst surfaced in 1952. Due to the rapidly deteriorating balance of payment position that Japan was experiencing in the aftermath of a nation defeated, the Ministry for International Trade and Industry (MITI), the Bank of Japan (BOJ), and the Ministry of Finance (MOF) began to increasingly favor components manufacturers over automotive assemblers in their directives, leading eventually to the passing of The Provisional Act in 1956 (Yamazaki, 2003, pp. 18–25). In MITI’s assessment (MITI Heavy Industry Division [Tsuushou Sangyoushou Juukougyouka]2 1956, pp. 16–37), the major problem confronting both the assemblers and the parts makers was dilapidated capital equipment, which left Japan behind its US and European counterparts in global competitiveness. In addition, the components suppliers had speciﬁc problems, such as low productivity, inefﬁcient small-lot production methods, and their over-reliance on the chassis makers for technological training and customs. To solve the ﬁrst problem, MITI could persuade Japan’s central bank (BOJ) and MOF to permit the import of foreign machinery and technology, yet a severe foreign reserves shortage meant that such scarce resource had to be allocated on a priority basis. In order to satisfy the BOJ and MOF constraint, MITI gave preference to the parts suppliers over the assemblers. The Ministry believed that a strong upstream industry equipped with modern, state-of-the-art, imported technology would underpin the ultimate international competitiveness of its downstream industry. Moreover, in its quest to modernize the manufacturing process, each assembler in a small overcrowded domestic market would merely be duplicating the import of foreign capital equipment, thus wasting valuable foreign exchanges.

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An ideal solution was to grant the right to import to only the components makers in the general machinery industry. Small- and medium-sized ﬁrms (SMEs) with the potential to reap economies of scale through the supply of standard and common parts to all domestic car manufacturers were to be given such privilege. Hence, The Provisional Act mandated that MITI’s approval be sought before foreign machinery could be imported (MITI, 1956, p. 58). In addition, SMEs capitalized at 100 million yen or below (Odaka, 1996, p. 342) had access to low-interest ﬁnancing through a competitive bidding process (see Diagram 1). This combination of incentives had altered the payoff structure for both the chassis manufacturers and SME components makers alike, and might have given incentives for Toyota to form a collaborative relationship with a number of its key suppliers. Its relationship with Denso in particular later developed into an important strategic alliance.

RESOURCE HETEROGENEITY: TOYOTA VERSUS NISSAN Denso was once housed within Toyota. It was spun-off to become an independent entity in 1949. Toyota’s spin-off history started in 1941. Fruin (1992, pp. 265–266) noted that Toyota’s spin-offs were not driven by strategic considerations; rather they were responses to the ﬁnancial strife that the ﬁrm had found itself in throughout the 1940s. In this respect, Toyota’s spin-off actions were not deliberate internal corporate venturing (Elfring & Foss, 2000). Toyota had spun-off a total of nine divisions in order to ensure its own ﬁnancial viability during World War II and the difﬁcult early post-war years (Diagram 2). Industry observer noted that ‘‘this Toyota style of management stood out within the automobile industry as being unique’’ (Kousei Torihiki Kyoukai, 1959, p. 77). Nissan Motor Corp. was part of the Nissan Conglomerate and it was better endowed with capital than Toyota.3 It did not have the same ﬁnancial constraints that Toyota had and it did not have a need to spin-off divisions during this period. One of Nissan’s strategic logics was to absorb foreign technology at the assembler level (Cusumano, 1985, p. 375). The automaker had a technology tie-up with Austin. Toyota, in contrast, positioned itself as a company taking pride in ‘‘100% domestic technology,’’ and reliance on domestic technology was favored by the government in the 1950s.

Toyota’s Competitive Advantage: A Contrastive Study with Nissan The problems confronting the automobile industry in the 1950s:

MITI Solutions

1. Dilapidated capital equipment for both the chassis makers & parts suppliers

Import foreign technology and machinery

Supplier-specific Problems:

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BOJ & MOF Constraints: Insufficient foreign reserves to pay for imported equipment for each chassis maker. Scarce resource would be more efficiently allocated if all chassis requirements were pooled together.

2. Low Productivity

3. Small-lot Production

4. Dependence on the chassis makers

MITI’s Ultimate goal (Stage 2):

Give chassis makers incentives to (Stage1) nurture subcontractors so they could (Stage 2) become independent parts suppliers with economies of scale.

Incentive and check: Independent Specialised Components Makers e.g. Denso, Aisin, others

Low interest loans for parts suppliers capable of specialisation and economies of scale. MITI approval required for machinery import.

Toyota

Nissan

Diagram 1.

Isuzu, etc.

Toyota Sharing MITI’s Ultimate Goal.

As mentioned earlier, Japan had developed a persistent balance of payment deﬁcit, and that was a grave concern for the BOJ. The industrial policy designed by MITI had two goals (Amagai, 1982, pp. 160–161). The ﬁrst goal, or stage one, was to provide an incentive infrastructure (lower than market interest rates and the privilege to access

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EVELYN ANDERSON The Toyota Group (in 1976)

Toyoda Auto Loom

TMC

Toyota Motor Corp (TMC) 1937 Toyoda Engineering Spun-off in 1941

Toyoda Engineering

Aichi Industries Spun-off in 1943

Aisin Seiki

Toyoda Auto Loom

Sinkawa Industries merged with Aichi Industries in 1965

Aichi Enamel Spun-off in 1949

Aichi Steel Works Spun-off in 1940

Nisshin Finance Spun-off in 1949

Toyota Auto Body Spun-off in 1945

Toyota Auto Body

Nippon Denso Spun-off in 1949

Denso

Toyoda Spinning & Weaving Spun-off in 1950

Toyoda Spinning & Weaving

Toyota Motor sales (TMS) Spun-off in 1950

Toyota Motor Sales (TMS)

Aichi Steel Works

Toyoda Trading

Diagram 2. Toyota’s Spin-off History. Sources: Modern Business Research (1976, p. 132), Kousei Torihiki Kyoukai (1959, pp. 76–77), Fruin (1992, pp. 265–266), and Miyoshi (1996, pp. 22–23).

foreign reserves for payment of imported technology) for auto assemblers to ‘‘nurture’’ SME suppliers. Auto assemblers were encouraged to provide technological training and management know-how in order to raise the productivity of the suppliers. The second goal, or stage two, was to allow

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capable SME suppliers to attain economies of scale and to ultimately become independent of their assemblers. Stage two was the ultimate goal of MITI. The Ministry believed that a strong and competitive machinery industry was essential to support the international competitiveness of its downstream industry, of which the automobile industry was one. Stage two, however, would present a dilemma for some assemblers. They were to invest their time and energy in cultivating a keiretsu supplier relationship, only to have their members become independent later. Nissan lost its special status from the government in the early 1950s because it was not a company with ‘‘pure domestic technology.’’ It had been denied both an allocation of foreign reserves (1952) and subsidized domestic credit (1953). Both were to fund essential purchases of imported technology, and other capital equipment (Nihon Jidousha Kaigisho, 1954, p. 303, 1957, pp. 321–323). It is plausible that Nissan valued the accumulation of physical assets with embedded foreign technology. Nissan might have preferred to retain its investment and technology in their wholly owned subsidiary keiretsu ﬁrms instead of allowing them to become independent as per MITI design. Mintzberg, Lampel, Quinn, and Ghoshal (2003, p. 7) considered strategy as both a position and a perspective. As a position, strategy involves locating a ﬁrm within its environment and providing a match between the organization and the environment. As a perspective, a ﬁrm’s strategy is based on an ‘‘ingrained way of perceiving the world.’’ With differing perspectives, come differing managerial cognitions. Sanchez, Heene, and Thomas (1996, p. 31) pointed out that managerial cognitions affect ﬁrm strategies and industry structures. The incentives provided in The Provisional Act were the same for both Nissan and Toyota, yet the opportunity costs perceived by the two assemblers could be different. For Nissan, the opportunity cost of subcontracting to independent ﬁrms could be lower than integration initially, but it might prove to be high should keiretsu suppliers resort to opportunistic behavior once The Provisional Act expired. Nissan was better endowed with ﬁnancial resources and it might have preferred to use wholly owned subsidiaries as SME suppliers to qualify for MITI’s special credit and foreign reserves allocation. The Provisional Act was meant to be a temporary measure, and was originally intended for a mere ﬁve-year period.4 For the capital-constrained Toyota, which had narrowly escaped insolvency only six years earlier, outsourcing from its former divisions including Denso could be a better alternative for preserving the ﬁrm’s capital. Pre-existing ties with spun-off divisions were a unique Toyota asset made valuable by an industrial policy.

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THE TOYOTA KEIRETSU AND THE NISSAN KEIRETSU – SIMILAR BUT DIFFERENT Asanuma (1989), in his seminal article on the use of relational contracts as a common business practice in the Japanese automobile industry, did not make a distinction between the Toyota keiretsu and the Nissan keiretsu. He suggested that the governance structure of the Japanese automobile industry as a whole was different from the governance structure adopted by the Big Three (i.e., GM, Ford, and Chrysler) at the time of his writing. The US automakers were far more vertically integrated than the Japanese auto assemblers as a group. US automakers on average internalized 70% of its production as opposed to 30% in Japan. Subsequent analyses on the Japanese automobile industry drew upon Asanuma’s observation and the assumption was that both Toyota and Nissan had adopted an inter-ﬁrm governance structure based on trust and long-term relationships (e.g., Dyer, 1994, 1996a, 1996b). This paper submits that coinciding with the Provisional Act period (1956–1970), the Toyota governance structure was based on inter-ﬁrm collaboration, whereas Nissan’s strategic logic was to integrate its core keiretsu members. Analysis at the core keiretsu level is important because the Toyota and Nissan core keiretsu ﬁrms constituted approximately 15% of their lead ﬁrm’s total value added. Since Toyota and Nissan produced 30% of their total value added in-house, the contributions made by their core keiretsu ﬁrms were half as much as the lead ﬁrms’ share. The core keiretsu ﬁrms were therefore important suppliers for both automakers in their value chains. Denso and Aisin Seiki (to be abbreviated as Aisin) constituted the Toyota core keiretsu. Aisin was a merger between Aichi Industries and Sinkawa Industries in 1965 (see Diagram 2). Atsugi Motor Parts (to be abbreviated as Atsugi), Kanto Seiki, and Nihon Radiator constituted the Nissan core keiretsu (Nihon Jidousha Buhin Kougyoukai & Ooto Toreido Jaanaru, 1971, pp. 101–102). Although Denso was commonly referred to as a Toyota keiretsu member (which has in Japanese language the connotation of being a subsidiary and being lower in status than its ‘‘parent’’ ﬁrm), Denso was clearly an independent legal entity in its transaction relationship with Toyota during the 15-year period between 1957 and 1971 (Table 2). In 1957, Toyota held 8.39% of shares in Denso, and 19.62%5 in Aichi Industries. Denso manufactured electrical components for Toyota and Isuzu initially. In the assessment of Mr. Kiichiro Toyoda (founder of Toyota), electrical components commanded proprietary technology, which was critical to the quality of the ﬁnal product, the car itself. Mr. Toyoda was instrumental in forging a technology tie-up agreement between Denso and Bosch. Denso

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Toyota’s Competitive Advantage: A Contrastive Study with Nissan

Table 2.

Relationship between Toyota and Core Suppliers in 1957 and in 1971.

Toyota’s Stake in Core Suppliers

Denso Aisin

Toyota Group’s Share in Core Suppliers’ Sales

1957

1971

1957

1971

8.39% –

15% 18%

50% –

53% 65%

Sources: Ohkurasho. (1971). Yuuka Shouken Houkokusho [Company Annual Report]. Ohkurasho [Ministry of Finance], Tokyo; Kousei Torihiki Kyoukai. (1959). Jidousha Kougyou no Keizairyoku Shuuchuu no jittai. Tokyo: Kousei Torihiki Kyoukai; Nihon Jidousha Buhin Kougyoukai & Ooto Toreido Jaanaru. (Eds). (1971). Nihon no Jidousha Buhin Kougyou [Japanese Automotive Parts Industry]. Tokyo: Ooto Toreido Jaanaru.

Table 3. Nissan’s Relation with Its Three Subsidiaries in 1956 and in 1971. Nissan’s Stake in Subsidiary

Atsugi Kanto Seiki Nihon Radiator

Nissan Group’s Share in Subsidiary’s Sales

1956

1971

1956

1971

100% 100% 60%

70% 93% 62%

100% 100% 100%

100% 88% 86%

Sources: Ohkurasho. (1956, 1971). Yuuka Shouken Houkokusho [Company Annual Report]. Ohkurasho [Ministry of Finance], Tokyo; Jidousha Buhin Kougyoukai & Jidousha Jaanaru. (Eds). (1956). Nihon no Jidousha Buhin Kougyou [Japanese Automotive Parts Industry]. Tokyo: Jidousha Jaanarusha; Nihon Jidousha Buhin Kougyoukai & Ooto Toreido Jaanaru. (Eds). (1971). Nihon no Jidousha Buhin Kougyou [Japanese Automotive Parts Industry]. Tokyo: Ooto Toreido Jaanaru.

supplied Toyota with 50% of its total production output on average and the other 50% of the components ﬁrm’s production was distributed among all other auto assemblers with the exception of Nissan.6 In contrast, three supplier ﬁrms in the Nissan keiretsu, which manufactured similar lines of products as Denso and Aisin, were in effect ‘‘true’’ subsidiaries of Nissan according to Mr. Ohta, who was the Managing Director for Nissan during the Provisional Act period. They were Atsugi, Kanto Seiki, and Nihon Radiator. Both Atsugi and Kanto Seiki were 100% owned by Nissan at inception. Nissan had a 60% stake in Nihon Radiator in 1956 (Table 3). All three keiretsu ﬁrms supplied exclusively to its parent company. The value added of the three wholly owned subsidiaries amounted to approximately 15% of Nissan’s total production value. Nissan’s in-house

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production ratio was commonly understood to be 30% (which was comparable to Toyota’s). However, according to Mr. Ohta’s estimation, Nissan’s in-house production ratio was actually 45–55% when the contributions of the three subsidiaries were added (Nihon Jidousha Buhin Kougyoukai & Ooto Toreido Jaanaru, 1971, pp. 101–102). Since both Nissan and Toyota had similar gross sales between 1956 and 1970, and Toyota’s in-house production was 30% of its total value-added, one may conclude that Nissan was 1.5–1.8 times (45%/30% and 55%/30%) more integrated than Toyota during that 15-year period. Atsugi, like Denso, also began as an internal division within Nissan. Unlike Denso, however, the nuts, bolts, and screws division was not spun-off in economic hard times. It became a subsidiary in May 1956 (Nissan Motor Corp. Company History Committee, 1975), just prior to the enactment of The Provisional Act. Again, unlike Denso, the ﬁrm’s initial product lines did not command proprietary technology. However, they conformed to MITI’s guidelines, as nuts, bolts, and screws were good candidates for reaping economies of scale. This Nissan subsidiary won many of MITI’s competitive grants and rapidly diversiﬁed into technology-embedded components. It manufactured components in the same groups of technology as Aisin, namely, areas relating to pistons, clutches, steering, and pumps. Kanto Seiki was also incorporated in 1956, and the ﬁrm manufactured electrical parts including odometers and tachometers. Nihon Radiator, as the ﬁrm’s name suggests, manufactured radiators and related products (see Table 6). Under The Provisional Act, low-cost ﬁnancing and more importantly, foreign currency allocation were made available to SME components suppliers through a competitive bidding process (Odaka, 1996, pp. 342– 343). Denso was successful 12 times. The three Nissan subsidiaries were also competitive, with Atsugi and Nihon Radiator receiving special funding nine times each, and Kanto Seiki eight times (Anderson, 2004, 2007). The standard of quality achieved by both core keiretsu networks also seemed comparable. Nihon Radiator won the Deming Prize in 1959 while Denso was awarded the same prize in 1961. Kanto Seiki was designated by MITI in 1958 as a model factory, showcasing modern imported equipment and best practice management process (Anderson, 2003, 2007).

COMPETITIVE ADVANTAGE: PATHS, PROCESSES, AND INIMITABILITY Teece, Pisano, and Shuen (2000, p. 341) argued that ‘‘the competitive advantage of ﬁrms lies with its managerial and organizational processes, its

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present position, and the paths available to it.’’ These constitute dynamic capabilities, which as the name suggests, is not a static concept. It had its origin in Schumpeter’s idea of ‘‘creative destruction.’’ In a world of Schumpeterian competition, a strategic challenge is to identify difﬁcult-toimitate internal and external competences that are likely to support valuable products and services. Learned et al. proposed that the real key to a company’s success or even to its future development lies in its ability to ﬁnd or create ‘‘a competence that is truly distinctive’’ (Teece, Pisano, & Shuen, 1997, p. 510). The analysis in this section draws upon the framework of dynamic capabilities and competences. It will address the issues of paths, processes, and inimitability.

Path-Dependency To Teece et al. (1997, p. 522) history matters, and ‘‘(t)he importance of path dependencies is ampliﬁed where conditions of increasing returns to adoption exist.’’ One source of increasing return to adoption is found in scale economies in production. The works of Donaldson (2000) and Lamarque (2005) are also relevant in analyzing the source of Toyota’s competitive advantage, and how it was gained initially through path dependency. Both authors stress the importance of matching strategy to organization structure and organizational structure to resources. They are supportive of the proposition put forward by Learned, Christensen, Andrews, and Guth (1969) that ‘‘(e)very organization has actual and potential strengths and weaknesses; it is important to try to determine what they are and to distinguish one from the other’’ (as cited in Teece et al., 1997, p. 513). In other words, these authors suggest that an organizational structure that facilitates the development of unique assets, competences, and skills will contribute to superior proﬁt and a competitive advantage for the ﬁrm. Extant literature (Asanuma, 1989) took the Toyota and Nissan organizational (governance) structure as the same. This paper submits that the Toyota keiretsu was different from the Nissan keiretsu in governance structure in the early post-war years. The Toyota keiretsu was based on inter-ﬁrm collaboration; whereas Nissan’s strategic logic was vertical integration in its relationship with its core keiretsu members. The Toyota and Nissan management adopted two different strategies in response to the competitive and regulatory context that prevailed in Japan in the post-war period during the 1950s. Each assembler negotiated its own strategic logic based on the ﬁrm’s unique resources and capabilities.

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Toyota Nissan

Sales in million yen

8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000

19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98

0

Year

Graph 1.

Comparative Sales of Toyota versus Nissan 1956–1999. Source: Ohkurasho (Various Years).

Although Toyota and Nissan took two different paths by adopting two different organizational structures during the enactment of The Provisional Act, the performance of the two auto assemblers during this period did not appear to be signiﬁcantly different from each other. The results of Toyota and Nissan’s structuring endeavors can be traced in the following graphs. Graph 1 compares the market shares of Toyota and Nissan between 1956 and 1999. Graph 2 shows the operating proﬁt of the two ﬁrms in the same period. The two assemblers had about equal market shares up until 1974, from there the divergence began and the divergent trend became particularly pronounced from 1983 onward. Likewise Toyota and Nissan were equally proﬁtable at the operation level during the 15 years that the legislation was enforced, and again divergent performance began around 1982–1983.7 The rest of this section examines how the seeds of performance differences in the long term might have been sowed during The Provisional Act period. Path-dependency as one source of Toyota’s competitive advantage is discussed. The two assemblers’ performance measured in terms of sales and operating proﬁt was very similar between 1956 and 1970. During this period, Toyota outsourced critical technology to Denso while Nissan internalized the

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Toyota's Operating Profit Nissan's Operating Profit

12.00 10.00 8.00 6.00 4.00 2.00

56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98

0.00 19

Operating Profit as a Percentage of Sales

14.00

-2.00 -4.00

Year

Graph 2.

Comparative Operating Proﬁts 1956–1999. Source: Ohkurasho (Various Years).

production of key components that embodied proprietary technology. Each automaker has chosen an organizational structure that matched their respective resources, competences, and capabilities. As Graphs 1 and 2 indicate, both ﬁrms had achieved similar market shares and operating proﬁt. Governance in the ﬁrst 15 years did not seem to contribute to inter-ﬁrm performance difference. Toyota’s initial competitive advantage was not apparent; it was embedded in its collaborative relationship with Denso. The assembler reaped the beneﬁts of scale economies, not within Toyota itself (for Toyota and Nissan had equal market shares), but through Denso. When Denso was ‘‘spun-off’’ from Toyota in 1949, the survival strategy for the newly ‘‘independent’’ electrical parts supplier was customer diversiﬁcation. Isuzu was Denso’s other major customer besides Toyota. The relationship between Denso and Toyota was never exclusive (Anderson, 2003). Denso grew rapidly during the ﬁrst 10 years of The Provisional Act period; achieving economies of scale as its customers were not restricted to Toyota alone. By 1975, Denso supplied to all auto assemblers, except Nissan (Anderson, 2003, p. 23). In contrast, the relationship between Nissan and its core keiretsu parts

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suppliers was exclusive. Table 3 shows that Nihon Radiator, Atsugi, and Kanto Seiki supplied exclusively to Nissan in 1956. The ratios declined to 86% for Nihon Radiator, 88% for Kanto Seiki, while Atsugi remained unchanged at 100% in 1971. In MITI’s paradigm, Nissan had achieved the Ministry’s ﬁrst goal, while Toyota achieved the second (ultimate) goal. Customer diversiﬁcation (in the case of Denso) per se is not normally considered a source of competitive advantage. However, achieving economies of scale at a time when one’s competitors (Nihon Radiator, Atusgi, and Kanto Seiki) pursued an exclusive relationship with only their ‘‘parent’’ company might have created a path-dependency strategy that was difﬁcult for rivals in the industry to emulate later. This ﬁrst mover advantage gave rise to time compression diseconomies, and the ﬁrst to learn by doing became an industry leader, leaving imitators months if not years behind. Denso was spun-off in economic hard times. Its survival strategies were customer and product diversiﬁcation. Denso’s strategic logic gave rise to economies of scale and scope, and the ﬁrm’s subsequent performance was beyond the match of its technology competitors (Table 4). Nihon Radiator, Atsugi, and Kanto Seiki remained small by comparison; and unlike Denso, they were never listed on the First Board of the Stock Exchange. The policy to encourage parts suppliers to achieve independence from Toyota through economies of scale (by means of customer diversiﬁcation) was part of Toyota’s deliberate strategy during the period of The Provisional Act (Anderson, 2003, pp. 21–22). Neither Denso nor Aisin was Toyota’s subsidiary. In contrast, Nissan’s strategy was to ‘‘nurture’’ parts suppliers Table 4.

Denso’s Rapid Growth 1956–1965.

Kishinho Rounds

Year

Denso Sales (in Million Yen)

No. of Employees at Denso

First round

1956 1957 1958 1959 1960 1961 1962 1963 1964 1965

3,364 4,680 4,757 6,779 11,039 14,066 15,104 19,761 25,429 27,919

1,745 2,422 2,389 2,823 3,875 4,968 5,260 5,569 6,697 7,182

Second round

Source: Nippon Densou Kabushiki Kaisha Shashi Henshuu Iinkai. (Ed.) (1984). Nippon Densou 35 nen shashi [Nippon Densou Thirty Five Year Company History]. Nagoya: Nippon Densou, p. 58.

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but it stopped short at allowing them ‘‘independence’’ lest that might incur contingency loss on the ‘‘parent’’ company. The three core keiretsu ﬁrms (Nihon Radiator, Atsugi, and Kanto Seiki) were in effect Nissan’s subsidiaries. Furthermore, Nissan had sufﬁcient controlling interest8 of over 33% in its extended keiretsu,9 and a minimum controlling interest of 25% in the rest of its extended keiretsu10 during the Provisional Act period. All of Nissan’s core and extended keiretsu ﬁrms were recipients of MITI’s special low-cost credit. They had an exclusive relationship initially with Nissan but later they diversiﬁed their customers to include the Nissan Conglomerate (the Nissan-ken).11 They did not achieve the same level of economies of scale as Denso, nor Aisin of the Toyota keiretsu, as they were bound by their exclusive relationship with its ‘‘parent’’ company. Both Toyota and Nissan took actions that were consistent with the implementation of their strategies. Toyota rejected an offer to merge with Prince Motors in 1964. Instead, the assembler encouraged a merger between Aichi Kogyou and Sinkawa Kougyou to form Aisin in 1965 (Toyoda, 1985, pp. 130–134 and Aisin Seiki Company History Editorial Committee, 1985, p. 7). Like Denso, Aichi Kogyou was one of several companies spun-off from Toyota. After separating from Toyota, Aichi Kogyou also diversiﬁed into other lines of products, such as sewing machines, knitting machines, other household electrical appliances including washing machines, refrigerators, vacuum cleaners, and bedroom coolers. Aisin grew rapidly after 1965, attaining both economies of scale and scope. Toyota’s decision was consistent with the ﬁrm’s strategy of compliance with MITI’s ultimate goal, rather than the accumulation of physical assets (i.e., MITI’s ﬁrst goal). Nissan, in contrast, acquired the insolvent Prince in 1966 (Toyoda, 1985, pp. 130–134). Nissan’s action was also consistent with its strategic logic of vertical integration. In summary, ‘‘history’’ did matter when analyzing Toyota’s competitive advantage. This paper contributes to existing literature of the Japanese automobile industry by identifying the historical and regulatory context that gave birth to two strategic logics. Both Toyota and Nissan were consistent in choosing an organizational structure that matched their ﬁrms’ resources and capabilities. However, Nissan’s strategic logic of vertical integration, asset accumulation, and technology contingency loss considerations might have prevented its subsidiaries to grow, and eventually they lost their battle of economies of scale and scope to Denso, an independent ﬁrm. Denso was once an internal division within Toyota. The supplier became a unique Toyota resource that was made proﬁtable through MITI’s industrial policy design. Toyota seemed to be aware of the value of its resources for it

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leveraged its existent competence by encouraging Aichi Industries to merge with Sinkawa Industries to create Aisin. Aisin also had a history of customer and product diversiﬁcation, which led to the development of two important competencies: economies of scale and economies of scope.

Managerial Process of Learning Teece et al. (2000, p. 342) noted ‘‘the way production is organized by management inside the ﬁrm is the source of differences in ﬁrms’ competence in various domainsyHow efﬁciently and effectively internal coordination or integration is achieved is very important (Aoki, 1990). Likewise for external coordination. Increasingly, strategic advantage requires the integration of external activities and technologies. The growing literature on strategic alliances, the virtual corporation, and buyer-supplier relations and technology collaboration evidences the importance of external integration and sourcing.’’ How production is organized in general by Toyota management inside and outside the ﬁrm is well documented (Clark & Fujimoto, 1991, 1999). This paper contributes to existing literature by exploring how Toyota managed its external resources and competency development, using Denso as an in-depth case study. Hannes and Fjeldstad (2000) have identiﬁed three types of competency, and each responds to a different type of competition. The ﬁrst one is entrepreneurial (or exploration), which is the equivalent of Porter’s differentiation. The second one is contractual, which exploits existing technology. The third one is operational (or exploitation), which is the equivalent of Porter’s cost strategy. Tallman and Fladmoe-Lindquist (2000) studied how global ﬁrms explored and exploited technical capabilities and managerial competence using subsidiaries and alliances. Driver and Cashman (2000) regarded learning as a key for both competence development (exploration) and maintenance (exploitation). There are two distinctive learning roles. They are operational adaptation and entrepreneurial innovation. Both types of learning roles will result in the development of organizational competency. However, low trust leads to adaptive learning, while high trust leads to innovative learning (pp. 54–55). Quynh and Martens (2008) examine three levels of capability: ordinary capability which is the ability to produce, implementation capability is the ability to improve, and evolutionary capability is the ability to create new products and/or services. All three levels of capabilities are vulnerable but inter-ﬁrm knowledge transfer is one way to reduce vulnerability.

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The Toyota–Denso partnership illustrates how high trust collaborations served as a vehicle for inter-organizational learning, which led to innovations. The incentives for the two ﬁrms to cooperate and to achieve complementary skills were provided in the 1950s in a regulatory environment that increasingly favored the suppliers. Mr. Kiichiro Toyoda, the founder of Toyota, noted how the engineers at Denso were struggling to acquire even the most basic technology. He introduced Denso to Bosch through a university contact he had. Bosch was looking for a licensee in Japan as part of its strategy to diversify the political risk that a Two-Germany policy posed. Through the recommendation of Dr. Mishima, a well-known magnetic steel scientist and a close friend of Mr. Toyoda, Bosch concluded a licensing agreement with Denso in 1953. Bosch was already a world-class company with superior technology and ‘‘scientiﬁc’’ managerial know-how. What Denso had learnt from Bosch was more than simply production technology. Bosch taught Denso an integrated system that gave birth to the ‘‘parts.’’ A well-known source of Toyota’s competitive advantage is found in the Toyota Production System (TPS), which encompasses Total Quality Control (TQC). TQC and its associated concepts of just-in-time (JIT) delivery, zero defect and fast inventory turnover gained world fame through the work of Womack, Jones, and Roos (1990). What was Denso’s role in delivering this world-class standard to its major customer in Toyota? Denso made two important contributions to building Toyota’s competitive advantage. The ﬁrst contribution was the development of Toyota’s TQC program and the achievement of a groundbreaking technology that helped Toyota to take market shares from Nissan. The second contribution was causal ambiguity for Toyota’s success in TPS. Denso’s First Contribution: Inter-Organizational Learning and Technological Breakthrough Denso’s ﬁrst contribution, in terms of inter-organizational learning and complementary skill development, was surprisingly less publicized. TQC was the brainchild of Denso. The components ﬁrm won the Deming Prize (a hallmark of quality) in 1961. The theme of Denso’s submission was Statistical Quality Control (SQC). Toyota embraced the concepts, and extended the application of quality control beyond the engineering department. Toyota called this extension of SQC Total Quality Control (TQC). Subsequently, Toyota also won the Deming Prize in 1965 based on its TQC practice (Anderson, 2003). Quality control alone, however, did not deliver a sustainable competitive advantage to Toyota in the early 1960s. The assembler’s archrival, Nissan also had a well-designed quality control

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program. In fact, Nissan preceded Toyota in winning the Deming Prize in 1960. Nor was Nissan far behind in inventory control in the early 1960s. Ironically, ‘‘just-in-time’’ was actually a phrase coined by Nissan in describing its inventory control system. Toyota had a less imaginative label; the ‘‘supermarket system’’ nevertheless described the essence of JIT delivery of car components (Yamazaki, 2003, p. 43). More importantly, Denso’s major contribution to Toyota’s success took place in 1983. Before that, in 1970, the Japanese government proactively required Japanese car manufacturers to comply with a series of progressively restrictive carbon emission standards. The ﬁnal absolute compliance date was 1978. In 1968, Denso created an integrated circuit (IC) research center to focus on the development of an electronic fuel injection (EFI) system as a solution for carbon emission reduction. The L-EFI developed by Denso provided reliability and precise control of fuel injection for efﬁcient combustion. The system was further perfected with the development of the O2 sensor, which was an important component identiﬁed by Toyota engineers. The integrated system of EFIþO2 sensorþthree element oxidation broke new ground. Not only did the subsequent patent of the Toyota Lean Combustion System comply with the world’s strictest standard imposed by the Japanese government in 1978, it also delivered the best fuel economy plus driving comfort, which were hitherto two paradoxical goals. L-EFI gained rapid market shares in 1983 as a result of falling unit price brought about by scale economies (Nippon Denso Company History Committee, 1984, p. 135). The complementary skill development of Toyota and Denso explained why Toyota took substantial market shares from Nissan in 1983 (see Graph 1). In summary, the Toyota–Denso alliance was bound by trust through a historical tie between the two ﬁrms. This led to innovative learning that gave rise to exploration and exploitation through inter-ﬁrm knowledge transfer. Normally, a negative relationship exists between exploration (differentiation strategy/entrepreneurial competence) and exploitation (low-cost strategy/ operational competence). However, Denso was able to deliver innovative (entrepreneurial) technology at low cost. Denso was an important partner for the development of Toyota’s competitive advantage.

TPS and Toyota’s Inimitability ‘‘The dynamic capabilities view of the ﬁrm would suggest that the behavior and performance of particular ﬁrms may be quite hard to replicate, even if

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its coherence and rationality are observable y . Thus far, we have argued that the competences and capabilities (and hence competitive advantage) of a ﬁrm rests fundamentally on processes, positions and paths (i.e., processes, positions and paths determine a ﬁrm’s competitive advantage). However, competences can provide competitive advantage and generate rents only if they are based on a collection of routines, skills, and complementary assets that are difﬁcult to imitate’’ (Teece et al., 1997, p. 524). The TPS is a collection of routines, skills, and complementary assets. It holds one of the keys to Toyota’s sustainable competitive advantage – this is a well-known proposition (Womack et al., 1990). The TPS and its observable coherence and rationality have been subject to intense examination and analysis (Coriat, 2000; Liker, 2004; Morgan & Liker, 2006), yet Toyota’s success remains difﬁcult to emulate. This section revisits the TPS and interprets the essential features of the system within the competitive context that prevailed at the onset of the system’s creation. The competition was between two strategic logics – inter-ﬁrm collaboration (Toyota) versus vertical integration (Nissan). Three types of inventory are involved in the manufacturing of motor vehicles (Lieberman & Asaba, 1997). The purchase of raw materials (RM) and components constitutes the inputs inventory. This reﬂects how efﬁciently inter-ﬁrm collaboration is being managed in the case of Toyota, which adopted strategic outsourcing. A vertically integrated ﬁrm that purchases parts from within the ﬁrm has less incentive to reduce RM inventory to the extent that zero inventory incurs coordination cost, such as frequent parts delivery. The second type of inventory is work-in-progress (WIP). These are the parts held internally by the vehicle assembler during the assembly process. This category reﬂects the operational efﬁciency of the assembler. The last category is ﬁnished goods (FG) held by the assembler for dispatch to its downstream distributors. Most researchers used either the average value of all three types of inventories or RM alone to evaluate the effectiveness of Toyota’s JIT program. Moreover, the focus was placed on how to improve inventory management, rather than how Toyota’s coordination costs were reduced. Graph 3 shows the breakdown of the average inventory into its three constituent categories for Toyota. Prior to 1963, the WIP and FG inventory were managed better than the RM inventory at times (e.g., 1952–1959 for FG and 1953–1960 for WIP). 1963 seemed to be an important year marking a possible policy change. From that point on, RM management improved dramatically. Likewise for FG, while improvements in WIP inventory were barely noticeable and only incremental at best.

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Inventory Turnover (Times)

250.00

Final Goods (FG) Raw Materials (RM) Work-In-Progress (WIP)

200.00

150.00

100.00

50.00

19 4 19 8 49 19 5 19 0 5 19 1 52 19 5 19 3 54 19 5 19 5 5 19 6 57 19 5 19 8 5 19 9 6 19 0 1961 6 19 2 6 19 3 64 19 6 19 5 6 19 6 67 19 6 19 8 69 19 7 19 0 71

0.00

Year

Graph 3.

Toyota’s Inventory Turnover 1948–1971. Source: Ohkurasho (Various Years).

Toyota’s governance structure was inter-ﬁrm collaboration during The Provisional Act period at both the RM and FG levels. Toyota’s supplier or keiretsu network involved inter-ﬁrm coordination at the RM level. At the FG or distribution level, Toyota also had an inter-ﬁrm governance structure. The automaker was forced by its bank to cleave off its distribution division in 1950, or risk losing a crucial credit extension at a time when the ﬁrm was teetering on the brink of bankruptcy. Toyota Motor Sales (TMS) was made into a separate entity that year (Toyota Motor Corps, 1987, pp. 232–234). Nissan, in comparison, was both backwardly (at the core and extended keiretsu levels) and forwardly integrated. The differences in RM and FG inventory turnovers during the 15 years of The Provisional Act can therefore be explained in terms of governance differences. Denso’s Second Contribution: Causal Ambiguity Extant literature marvels at Toyota’s inventory management. Toyota’s RM and FG inventory turnover post-1964 was indeed impressive. The Toyota inventory management system has been studied intensely, with

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characteristics of the Toyota management as the focus of analysis. To date, no research has been conducted on the role of Denso (and other Toyota suppliers) and how it might contribute to the extraordinary efﬁciency that Toyota’s lean production system (or TPS) delivered. This section examines Denso’s second contribution in the area of TPS. Denso’s role was subtle but nevertheless important in winning Toyota a sustainable competitive advantage possibly by way of causal ambiguity. Graph 4 compares the RM management of Toyota and Nissan. Interestingly, the two majors were equally efﬁcient on balance in RM inventory control up until 1964. Toyota left Nissan far behind after 1964. What happened in 1963–1964? This question will be answered in light of Denso’s role. RM inventory turnover is obtained from dividing sales by inventory of purchased parts. Since the gross sales for both Toyota and Nissan were roughly the same in this period, the improvement in Toyota’s inventory turnover must be due to low or close to zero inventory kept on Toyota’s premise, the so-called JIT delivery. JIT delivery, as the name suggests, requires the components makers to deliver the right components (zero defect), in the right quantity (no more and no less than required) at the right

300.00

RM Turnover (Times)

250.00

Toyota RM Turnover Nissan RM Turnover

200.00

150.00

100.00

50.00

19 4 19 8 4 19 9 50 19 5 19 1 52 19 5 19 3 54 19 5 19 5 5 19 6 57 19 5 19 8 5 19 9 6 19 0 6 19 1 62 19 6 19 3 64 19 6 19 5 6 19 6 67 19 6 19 8 69

0.00

Year

Graph 4.

Comparative RM Management. Source: Ohkurasho (Various Years).

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time. The assembler saves on inventory costs, but the parts suppliers incur coordination cost should they agree to pay for the cost of frequent deliveries. In a vertically integrated organization, such as Nissan, the improvement in inventory turnover beyond the required efﬁciency level was unwarranted, for frequent deliveries would incur coordination cost, which is eventually borne by the entity itself irrespective of how it is being distributed among the different subsidiaries. In Toyota’s case, however, the parts suppliers and speciﬁcally Denso had agreed to absorb the coordination costs (Table 5) in the second half of 1963. The rent appropriation in the collaborative partnership between Toyota and Denso appeared to be unfair at ﬁrst glance. For example, Toyota’s sales were 10.5 times that of Denso. Toyota’s gross proﬁt was 8 times that of Denso but its operating proﬁt was 11.6 times that of its supplier. Toyota spent disproportionately less in some areas relating to coordination costs incurred in outsourcing. Denso absorbed the complete cost of patents usage, delivery costs, packaging, and returned goods. Toyota’s expenses in these four categories were zero. Toyota’s expenditure on advertising, bad debts provisions, executive expense account (entertaining guests and customers, etc.), and intercity/interstate/overseas travels were all proportionately lower than Denso, given the difference in the size of the two companies. Table 5. Denso’s Share of Toyota’s Coordination and Administration Costs in the Second Half of 1963 (Measured in Million Yen).

Gross sales Gross proﬁt Operating proﬁt Sales and general expenses Patents usage fees Transport costs Packaging Returned goods Salaries and wages Advertising/PR Bad debts provisions Executives expense accounts Interstate/overseas travels Consumables

Denso

Toyota

Toyota/Denso (Times)

10,348 2,584 1,230 1,354 185 76 57 39 161 151 61 37 37 16

108,754 20,720 14,297 6,423 0 0 0 0 504 298 200 66 41 175

10.5 8 11.6 4.7

3.1 2.0 3.3 1.8 1.1 10.9

Source: Jidousha Buhin Kougyoukai & Jidousha Jaanaru. (Eds). (1965). Nihon no Jidousha Buhin Kougyou [Japanese Automotive Parts Industry]. Tokyo: Jidousha Jaanarusha, p. 89.

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Why would Denso accept such seemingly unequal distribution of costs when it was Denso who was the innovator in quality control? Although Denso was the one that laid the foundation for the TQC program incorporating JIT and zero defects, it may be argued that the cost of patents usage, JIT delivery costs, packaging, and defective parts were part of the quality control program, and therefore such costs should be borne by the supplier. This arrangement would provide incentives for Denso to deliver JIT quality products at low cost – which was not only a Toyota requirement, but also of value to customers other than Toyota. As for the other costs, the ‘‘unfair’’ distribution may give the impression that Denso was a Toyota keiretsu ‘‘subsidiary,’’ contributing to confusion among Toyota’s competitor(s), who may want to emulate Toyota’s success by forming a ‘‘trust’’based keiretsu supplier network. From Denso’s perspective, the trade-off for a demanding customer may be the security of a long-term relationship with a signiﬁcant buyer. Speculations aside, it is evident that Denso was competitively capable, for even after having factored in coordination and administration costs, some of which should normally fall due on the assembler, Denso’s operating proﬁt was only proportionately slightly lower than Toyota’s in the latter half of 1963. Toyota and Nissan took very different approaches to how they handled coordination costs. Toyota seemed to understand the importance of coordination costs minimization when managing Denso and Aisin, which constituted its core technology. In contrast, Nissan seemed to have incurred coordination cost in its management of core technology among its keiretsu members, even though some of them were vertically integrated. Tables 6 and 7 show how Toyota and Nissan outsourced key components requirements from their respective networks in 1975. Nissan took a multiple sourcing policy; sometimes part of the order was produced in-house in order to stimulate competition.12 This incurred coordination cost. Toyota sourced 100% of its requirement from Denso and Aisin for many of its parts requirement, lowering coordination cost. Referring to Table 6,13 Denso was the sole supplier of 17 technology items and a cosupplier of 9 items. The corresponding numbers for Aisin were 10 and 3. Both ﬁrms have generated economies of scope. In contrast, Atsugi was the sole supplier to Nissan for only 1 item but 13 as a joint supplier (very often competing with another keiretsu member, e.g., Daikin). Nihon Radiator, Kanto Seiki, and Tsuchiya14 did not seem to have achieved economies of scope. Another example that serves to illustrate Toyota’s policy of coordination cost minimization is provided in Graph 5. Toyota’s FG inventory turnover fell sharply in 1982. In January that year TMS was re-absorbed into TMC.

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Table 6.

Economies of Scope Among Parts Suppliers.

Parts

Toyota

Nissan

Fuel pump

Denso

Fuel supply pump Injection pump Nozzles Nozzle keeper Gasoline ﬁlter

Denso Denso Denso Denso Denso Kyousan Denki Denso Denso Tokyo Roki Denso Kojima Press Maruhachi Kougyou Denso Denso

Mitsubishi Jidousha Kiki Not applicable (N/A) N/A N/A N/A Tsuchiya Kyousan Denki Tsuchiya Tsuchiya

Air cleaner Air cleaner element Air cleaner case

Oil cleaner Oil cooler Radiator Generator

Denso Touyou Radiator Denso

Starting Motor

Denso

Voltage regulator

Denso

Power supply/distributor

Denso

Spark coil

Denso

Spark plug

Denso Nihon Special Ceramic Denso

Glow plug Flusher unit Meters

Air conditioning

Denso Denso Yazaki Denso Yazaki Denso Yazaki Denso

Car heater

Denso

Odometer Cable casing

Tsuchiya

Tsuchiya Tsuchiya Nihon Radiator Nihon Radiator Hitachi Mitsubishi Hitachi Mitsubishi Hitachi Mitsubishi Hitachi Mitsubishi Hitachi Densoa Hitachi Nihon Special Ceramic Nihon Special Ceramic Eiko Denki Nairusu Kantou Seiki Kantou Seiki Kantou Seiki Hayashi Spring Hitachi Diesel Kiki Nihon Radiator Diesel Kiki

Toyota’s Competitive Advantage: A Contrastive Study with Nissan

Table 6. (Continued ) Parts

Toyota

Nissan

Exhaust gas cleaner

Denso Aisan Kougyou Aisin Art Piston Aisin

Hitachi Tokyo Sokuhan Atsugi Aato Metal Atsugi Aato Metal Atsugi

Piston Piston pin Water pump Oil pump

Aisin Aisan Kougyou Aisin

Timing gear case

Aisin

Cooling fan

Aisin Toyoda Tekko Ishikawa

Tie rod Steering knuckle Steering ball joint

Tokyo Tanko Toyoda Kouki Ishikawa

Steering ball joint ASSY

Ishikawa

Clutch

Aisin

Clutch disc

Aisin

Clutch facing

Aisin

Clutch pressure plate

Aisin

Clutch cover

Aisin

Clutch spring

Aisin

Clutch lever Exhaust pipe

Aisin Sango Futaba

Source: Nihon Jidousha Kaigisho (1975, pp. 221–237). This is the only part that Denso supplied to Nissan in 1975.

a

Atsugi Tochigi Fuji Hitachi Metal Sanwa Kougyou Fusou Keigoukin Nihon Radiator Ohi Atsugi Rizumu Atsugi Rizumu Atsugi Rizumu Atsugi Rizumu Atsugi Daikin Atsugi Daikin Atsugi Daikin Atsugi Daikin Atsugi Daikin Atsugi Daikin Fuji Tekko Nihon Radiator

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Table 7.

Nissan’s Multiple Sourcing Policy in Relation to Atsugi. Nissan

Nissan Diesel

Fuji Juuko

Piston

Atsugi Aato Metal

Atsugi Sakura Kogyou

Piston pin

Atsugi Aato Metal Atsugi Tochigi Fuji

Atsugi Riken Piston Izumi Auto Atsugi Hakuya tekkoujo Atsugi Tochigi Fuji Fuji Tekko Atsugi Rizumu Katakura

Oil pump

Tie rod

Atsugi Rizumu

Clutch

Atsugi Daikin Atsugi Daikin Hitachi Akebono Atsugi Daikin Atsugi Daikin

Clutch disc Clutch fencing Clutch pressure plate Clutch spring

Atsugi Daikin Atsugi Daikin Daikin Nikkou Seiki

Clutch lever

Atsugi Sakura Kogyou Atsugi Mikuni Kougyou Ishikawa Tekkou Kyouwa Sangyou Atsugi Daikin Atsugi Daikin Atsugi Daikin Atsugi Daikin Atsugi Daikin Atsugi Daikin

Source: Nihon Jidousha Kaigisho (1975, pp. 221–237).

Both Nissan and Toyota were forwardly integrated and their inventory turnover for FG became comparable again from 1984 onward. Summing up, Toyota is famous for its outstanding inventory management. Interestingly, Toyota and Nissan were comparable in their inventory management up until 1964. From then on, Toyota outperformed Nissan by a long margin in RM management. Toyota’s superior performance coincided with the year when Denso took on the coordination cost of Toyota’s JIT delivery. In Nissan’s case, since the automaker’s strategic logic was integration, redistributing coordination cost to its subsidiary suppliers would not lower the total cost of inventory minimization. There was no incentive for Nissan to keep up with Toyota’s remarkable track record. In 1982, Toyota forwardly integrated its distribution network, and Toyota’s FG inventory turnover fell to a level similar to Nissan’s. From 1982 onward, both Toyota and Nissan were forwardly integrated and the FG turnover for both became comparable. Toyota appeared to understand the importance of

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900.00 800.00

Nissan Toyota

Turnover %

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70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98

19

19

68

0.00

Year

Graph 5.

Comparative Final Goods Turnover Before and After 1982. Source: Ohkurasho (Various Years).

coordination cost minimization in the management of both its RM and FG inventories. Denso bore the coordination cost of Toyota’s JIT delivery and the ﬁrm might have confounded Toyota’s competitors by giving them the impression that the supplier was Toyota’s ‘‘competitive’’ and ‘‘subordinate’’ subsidiary. Nissan might have incurred unnecessary coordination cost and diseconomies of scale by pursuing a multiple sourcing policy in 1975, in an attempt to create competition for its core keiretsu subsidiaries. Outsourcing in theory provides high power market disciplines and incentives compared with integration (Asanuma, 1989; Williamson, 1991). Nissan’s change in strategic orientation and organizational structure might have come too late, as Denso had already established a ﬁrst-mover advantage initially in scale economies, followed by innovative technology development. This section illustrates that one of the sources of Toyota’s inimitability could be the causal ambiguity of Denso’s role in TPS. The TPS and its related concept of total quality management (TQM) has been the subject of vigorous analysis (Powell, 1995). Researchers could only describe the unobservable part of Toyota’s unique success in general terms, such as executive commitment and corporate culture (Donaldson, 2000,

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p. 41). The sources of Toyota’s inimitability remain unfathomable in concrete terms. This paper explored the origin of Toyota’s competitive advantage, how it evolved and the nature of Toyota’s inimitability in terms of its relationship with its key technology supplier – Denso. A contrastive study on Nissan, Toyota’s signiﬁcant competitor for over 50 years, helped to shed light on how Toyota achieved its competitive advantage, and why it was difﬁcult for Nissan to emulate. This paper supports the propositions put forward by competence-based literature and dynamic capabilities. Both Toyota and Nissan had distinctive resources and capabilities and each had observed the importance of choosing a matching strategic logic (Donaldson, 2000; Lamarque, 2005) in response to an exogenous government regulation. A ﬁrm may accumulate more assets than it can use, but not all of them become valuable resources (Sanchez et al., 1996, p. 54). Toyota had a unique asset in pre-existing ties with its spun-off divisions. This unique asset was made a valuable resource through a government industrial policy. Regulatory incentives provided a common interest objective for both Toyota and Denso to collaborate for at least 15 years during The Provisional Act period. Path-dependency (Teece et al., 2000) gave rise to Toyota’s partner ﬁrms (Denso and later Aisin) attaining economies of scale and scope which became difﬁcult for Nissan’s subsidiaries to reverse. The merits of trust-based inter-ﬁrm transfer of knowledge are well documented in competence-based literature (Driver & Cashman, 2000; Tallman & Fladmoe-Lindquist, 2000). Collaborative learning between Toyota and Denso translated into operational cost efﬁciency and later a groundbreaking entrepreneurial technology that delivered both ﬁrms a competitive advantage (Hannes & Fjeldstad, 2000). The two different strategic logics (inter-ﬁrm collaboration vs. integration) could not have explained the divergence of inter-ﬁrm performance in inventory management but for the causal ambiguity of Denso’s role in TPS. Causal ambiguity might have confused Nissan management, and prompted the automaker to change its organizational structure to expose its subsidiaries to market discipline. This however might have incurred unnecessary coordination costs and diseconomies of scale. Nissan might have inadvertently positioned itself further to Toyota’s competitive advantage. To recap, Toyota’s initial competitive advantage are derived from at least two competence sources: the automaker’s ability to minimize coordination cost in its inter-ﬁrm relationship management at both the RM and FG levels, and economies of scale and scope embedded in the technology products of its collaborative partners such as Denso. The major contribution of this paper is in the unraveling of causal ambiguity of Toyota’s success.

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CONCLUSIONS AND FUTURE RESEARCH Two major assemblers in the automobile industry adopted different strategic logics in response to an exogenous shock created by a change in the regulatory environment in the 1950s. One assembler was capital constrained and had just survived a near-death (bankruptcy) experience. Conservation of capital was foremost in management’s mind, be it capabilities building, or managerial processes. The other had recently been refused a foreign reserve allocation required for the import of critical foreign technology. Fear of losing physical assets dominated management’s vision. The relevant Japanese regulatory authority wanted the ‘‘parent’’ assembler to ‘‘nurture’’ their subsidiary components suppliers with the ultimate goal of helping the suppliers to gain independence through the attainment of scale economies. The incentives offered by the government’s ministry were low-cost funding and an allocation of scarce foreign currency for modernizing ﬁxed capital investment, which was essential for capabilities building. The only proviso was that assemblers need not apply; the competitive bidding process was open only to SME suppliers capitalized at below 100 million yen. The ﬁrst ﬁrm saw opportunities whereas the second ﬁrm saw opportunity costs. The ﬁrst ﬁrm complied with the ultimate bureaucratic directive by embracing inter-ﬁrm collaboration while the second ﬁrm stopped short at letting go of its suppliers (which was the government’s ﬁnal goal) for fear of losing ‘‘valuable’’ ﬁxed assets when the legislation expired. One set of incentives gave rise to two sets of strategic logics. The seeds of different resource strategies and management processes were planted in two organizations. Divergent paths ultimately led to divergent performances. The ﬁrst ﬁrm is Toyota and the second ﬁrm is Nissan. The two ﬁrms, despite their different strategic logic, performed equally well, in terms of market shares and operating proﬁt, for the entirety of The Provisional Act period. One major divergence during this period was in inventory control, remarkably pronounced in the management of raw materials and FG. Transactions of both types of inventory involved inter-ﬁrm coordination in Toyota’s case while on the other hand, Nissan transacted within the ﬁrm at the core level. Toyota’s organizational process in managing both its upstream and downstream relationships was consistent: the aim was coordination cost reduction for Toyota but not at the expense of quality. Nor was it at the expense of Denso the supplier, for the value distribution (measured as operating proﬁt as a percentage to gross sales) to the supplier was similar to Toyota’s. Frequent coordination established perfected routines, conﬁdence and trust in collaboration, leading to the

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development of complementary skills in higher levels of technological innovations. Mutual capability building ultimately delivered an industryﬁrst technology that captured signiﬁcant market shares from the ﬁrm’s archrival. Path dependency put Nissan on a course that was hampered by its strategic logic. The ﬁrm’s subsidiaries could not grow as fast as Denso or Aisin for they were constrained by the boundary of the ﬁrm. Nissan might have realized this disadvantage by 1971, for it started to reduce its stake in its three subsidiaries, and the three ﬁrms began to diversify beyond Nissan, but still within the Nissan conglomerate. Nissan also tried to introduce market discipline into its network by pursuing a multiple-sourcing policy. It required some of its subsidiaries to compete with at least one other supplier for procuring the same parts. This might have inadvertently incurred coordination cost and diseconomies of scale. Toyota’s strategic logic created economies of scale and scope for Denso (and later Aisin) at the expense of Nissan’s subsidiaries, which followed a different strategic logic. Path dependency was irreversible. Toyota established learning processes of promoting cooperation at the routine coordination (JIT, zero defects) level and later at the capability building level. These processes were responses to the network’s ﬁrst mover advantage (obtained from economies of scale and scope) and they allowed the assembler’s major suppliers (Denso and later Aisin) to deliver quality technology embedded components at low cost. Toyota is famous for its superior inventory management relative to Nissan. The management process governing value distribution (or cost appropriation) to resource providers was difﬁcult for competitors to understand, let alone to emulate. The fact that both industry and academia had perceived the two assemblers’ keiretsu as the same suggests causal ambiguity as another source of inimitability. Nissan’s attempt in the 1970s to emulate Toyota’s managerial process might have incurred coordination cost as it focused on the process and strategic logic rather than cost reduction measured in absolute terms. Moreover, once The Provisional Act expired in 1970, suppliers might be less willing to absorb coordination cost in the absence of a common interest objective. Sources of Toyota’s competitive advantage and inimitability were complex, dynamic, and difﬁcult to understand, but this paper illustrates that the framework provided in competence-based dynamic capability theory offers a useful lens for analysis. Of note here is that savings from minimal inventory stock may not be substantial during normal times. However, in times of high real interest rates, such as the deﬂationary period in Japan in the 1990s, low inventory cost could be a source of competitive advantage for both assemblers and

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suppliers alike. The ﬁnancial discipline that the system imposed on the parts suppliers may prove to be an important resource in a high real interest rate environment, especially when members of competing networks were not debt-free. Details of how Toyota positioned itself to build its ﬁnancial asset, such as a debt-free keiretsu network that could withstand ﬁnancial disintermediation and the credit crunch of the 1990s could present an interesting research topic for the future.

NOTES 1. Keiretsu is a Japanese style of cooperative business relationship between the assembler and its parts suppliers in the automobile industry. Up until 1999 (i.e. prior to Mr. Carlos Ghosn dismantled the Nissan keiretsu), it was considered to be a key explanation for the success of the Japanese automobile industry as a whole, since each Japanese assembler had its own keiretsu supplier network. 2. To be abbreviated as MITI in subsequent references. 3. The respective capitalization of Nissan and Toyota in 1933 was 10 million yen versus 1 million yen. Sources: Maruyama and Fujii (1997, p. 126) and Nippon Denso (1984, p. 3). For a more detailed account of how capital constraints had impacted on Toyota’s physical investments, see Maruyama and Fujii (1997, p. 130). 4. However, MITI was impressed with the success of the legislation and it was extended twice for two additional ﬁve-year periods. Source: Odaka (1996, p. 340). 5. According to Mr. Yoshii of Japan Excel Management, the Japanese corporate law deﬁnes a 25% ownership as minimum control, 33% a sufﬁcient control and 51% and above a clear control over management of the acquired ﬁrm. 6. Nissan did not buy from Denso for the automaker had its own exclusive supplier network. 7. The mean operating proﬁt for Nissan between 1956 and 1970 is 9.36% of gross sales; and for Toyota in the same period it is 11.08% of gross sales. The difference between the two means is not signiﬁcant at a ¼ 0.05. 8. According to Japanese corporate law, a 25% stake allows the shareholder to voice their concerns and to initiate changes at the company policy level. A 33% stake constitutes a sufﬁcient controlling interest, for the chairman at the Shareholders’ General Meeting rarely rejects the proposal put forward by the stakeholder. A 51% stake or more is a clear controlling interest. 9. They were: Ikeda Bussan, Daikin Seisaku, Nairusu Parts, Ooi Seisakujo and Tsuchiya Seisakujo. 10. They were: Fuji Kikou, Kinugawas Gomu, Nihon Purasuto, Hashimoto Foaming, Yamakawa Kougyou, Yamato Kougyou and Yorozu Jidousha. 11. The Nissan circle (Nissan ken) is a large conglomerate, which incorporates main banks and other related ﬁrms outside the automobile industry, such as Hitachi. The ﬁrms that were afﬁliated with Nissan Motors within the automotive industry during this period were Nissan Diesel and Fuji Juukou (which makes the Subaru brand).

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12. Asanuma (1989, p. 4) suggested that the Japanese automobile industry as a whole adopted a two-vendor policy and the purpose of which was to stimulate competition. He did not provide data to support his generalization. 13. The items that were not listed in Table 6 were: windscreen wiper for Denso; door lock, door hinge and jack for Aisin; propulsion shaft and universal joint for Atsugi. 14. This ﬁrm was a late Nissan acquisition. It was acquired in 1970, the year the ﬁnal round of The Provisional Act expired. Nissan had a sufﬁcient controlling interest of 38% in the company which supplied 76% of its parts to Nissan in 1971.

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TOWARD THE THEORY OF TEMPORARY COMPETITIVE ADVANTAGE IN INTERNATIONALIZATION Petri Ahokangas, Anita Juho and Lauri Haapanen ABSTRACT Building on the dynamic resource-based view, this paper suggests that increasing market dynamism and continued resource evolution contribute to the development of temporary competitive advantages utilized in the internationalization of high-technology ﬁrms. All competitive advantages needed for internationalization can ﬁrst be seen as temporary by nature, and it is the outcome of managerial selection and competition, conditioned by the determinants of market dynamism and resource evolution that some resources and advantages may become sustainable. Using a case study approach, this paper suggests that sustainable competitive advantages for internationalization emerge from the temporary advantages through a life cycle as the effects of market dynamism and resource evolution decrease, or their determinants lose relevance in the international markets. The paper aims to contribute to the theoretical discussion concerning the nature and consequences of managing temporary competitive advantages and the internationalization processes.

Enhancing Competences for Competitive Advantage Advances in Applied Business Strategy, Volume 12, 121–144 Copyright r 2010 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1108/S0749-6826(2010)0000012008

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INTRODUCTION One of the results of globalization and its concomitants, i.e., uncertainty, contextual complexity, and multipoint competition (Ricart, Enright, Ghemawat, Hart, & Khanna, 2004), has been increased interest paid to the role of developing and sustaining competitive advantages in international business. However, a growing number of companies have faced the fact that they are lacking, losing, or are unable to reach sustainable competitive advantages in their internationalization efforts. This appears to be especially true among the dynamic and fast-internationalizing hightechnology ﬁrms.1 If the sustainability of competitive advantage seems improbable, something else needs to be found. One of the trains of thought both practitioners and scholars have started to venture down is how to deal with the issue of the temporariness of competitive advantages in international business and internationalization. It is interesting to notice that one of the most cited theories of internationalization, the Uppsala model by Johanson and Vahlne (1977), refers to the process of internationalization as resource-based, cyclic, and experiential learning-by-doing process, seemingly anticipating later research streams concerning dynamic capabilities and temporary competitive advantages in the context of internationalization. Traditional stage theories of internationalization state that ﬁrms gradually develop their activities in foreign markets to increase their knowledge and experience in internationalization. According to the Uppsala model, ﬁrms expand ﬁrst to geographically close markets and then stage by stage continue to further markets (Johanson & Vahlne, 1977). Firms are assumed to slowly internationalize to gain knowledge, to reduce uncertainty, to avoid risks, as well as to adopt new ways of doing business. Growth-oriented hightechnology companies that are internationalizing rapidly to global markets are bound to follow the same process, but they engage in it proactively, as the entrepreneur is able to tolerate a higher level of uncertainty (Madsen & Servais, 1997). In a recent article, Johanson and Vahlne (2009) further develop their theory and link it with the network approach which has its roots in the resource-based view (RBV). In their 2009 article they emphasize the business opportunity recognition, which is rooted in knowledge development in business networks to deepen the current discussion within international business. Earlier, Sanchez (1996) emphasized that the ﬁrm’s capability as a network actor is a key resource for a ﬁrm in a dynamic business environment.

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Another approach to capturing the internationalization and growth of high-technology companies is provided by Oviatt and McDoudgall (2004). Oviatt and McDougall try to explain the very existence and sustainability of new international ventures through four elements: (1) internationalization of transactions, (2) reliance on alternative governance structures to access resources, (3) establishment of foreign location advantages, and (4) control over unique resources. This resource-oriented approach to internationalization nicely encapsulates many of the tenets of the network and RBV. This paper focuses on internationalization of high-technology companies from a dynamic RBV. The purpose of this paper is to delve into the emergence, role, and relationship of temporary and also sustainable competitive advantages in the internationalization of a high-technology company. Special attention is paid to the processes through which competitive advantages evolve over time. The process is researched and conclusions are drawn by describing and analyzing the development resources and internationalization of a high-technology company. We discuss the antecedents of temporary advantages and suggest and elaborate on how to approach internationalization from the viewpoint of temporary competitive advantage. Speciﬁcally, the aim of this paper is to analyze how temporary competitive advantages emerge or are developed. The basic research questions discussed in the paper are as follows: (1) How can temporary competitive advantage affect the internationalization process of high-technology ﬁrms? (2) How can temporary competitive advantages emerge from hightechnology ﬁrms’ internationalization? (3) What is the relationship between temporary and sustainable competitive advantages in internationalization? The empirical research setting selected for the paper consists of a single case study of a high-technology ﬁrm operating in the global ‘‘test and measurement sector’’ servicing the converging/mobile telecommunications networks industry. The analysis period covers the years 2000–2007. As an integral part of the rapidly maturing telecommunications industry, the test and measurement sector has been facing a steep global decline in business. In this kind of research setting, this paper focuses on elaborating and discussing the issue of temporary competitive advantage for internationalization by using an explorative, longitudinal case study approach.

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Internationalization of High-Tech Firms Ruzzier, Hisririch, and Antoncic (2006) identiﬁed three approaches to the internationalization of high-technology ﬁrms: the RBV, the network view (NV), and the international entrepreneurship view (IE). It is worth noting that all of these three approaches emphasize the role of resources, knowledge, international experience, and strategic alliances in internationalization. High-technology ﬁrms are typically acting in dynamic, highly specialized niche markets where the windows of opportunity are short and the ﬁrms face the challenge to decrease the technological life cycle in order to be more competitive (Crick & Jones, 2004; Komulainen, Mainela, & Ta¨htinen, 2006; Blomqvist, Hurmelinna-Laukkanen, Nummela, & Saarenketo, 2008). Customers and business activities, such as design, development, and marketing, are not geographically dependent and can be located all over the world (Blomqvist et al., 2008). When compared to multinational companies (MNCs), small high-technology ﬁrms are relatively vulnerable to risks and they have fewer internal resources that can be directed to their internationalization efforts (Oviatt & McDougall, 1994; Ellis, 2000, Coviello, Brodie & Munro, 2000). In practice, many ﬁrms are dependent on a single product that they commercialize globally (Weerawardena, Mort, Liesch, & Knight, 2007). Because of this lack of resources, these ﬁrms are trying to ﬁnd partners who complement their own competences in the international markets (Johanson & Mattson, 1988; Oviatt & McDougall, 1994; Varis, Kuivalainen & Saarenketo, 2005). Lately, the research on the internationalization of high-technology ﬁrms has been increasingly focusing on the role of networks in the process (Coviello & Munro, 1995; Coviello & McAuley, 1999; McAuley, 1999; Sharma & Blomstermo, 2003). The importance of industrial networks has long been appreciated by the proponents of the so-called Nordic school (Johanson & Vahlne, 1990, 2003). According to this approach, all ﬁrms are embedded, to a greater or lesser degree, in networks, which involve relationships with, e.g., customers, suppliers, and competitors. The networks often extend across industries and geographical, political, and cultural boundaries. The network approach to the internationalization of high-technology ﬁrms emphasizes the importance of interﬁrm ties in accumulating and utilizing knowledge, which, in turn, enlarges the spectrum of opportunities. Networks also reduce risks and stimulate proactive behavior and innovation in high-technology (Sharma & Blomstermo, 2003; Zucchella, 2006).

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The success of high-technology ﬁrms is often limited by a lack of resources, which includes ﬁnancial and technological resources (Varis et al., 2005). Although high-technology ﬁrms have limited ﬁrm-speciﬁc resources, the ﬁrms do have the ability to utilize external networks to overcome the lack of ﬁrm-speciﬁc resources and experiential knowledge (e.g., Coviello & McAuley, 1999; McAuley, 1999; Sharma & Blomstermo, 2003; Komulainen et al., 2006). Few ﬁrm-speciﬁc resources enable the ﬁrms to be agile, a great beneﬁt in dynamic high-technology markets (Ellis, 2000; Coviello et al., 2000). High-technology ﬁrms use networks to control a relatively large percentage of vital resources that provide a sustainable advantage in global markets (McDougall, Shane, & Oviatt, 1994; Oviatt & McDougall, 1994). It can be argued that networks provide the opportunity to acquire new capabilities and competences. Even though the network approach emphasizes the role of networks in the internationalization of high-tech ﬁrms, Weerawardena et al. (2007) argue that ﬁrms are not just a set of contacts but organizations that embody various resources and capabilities by which they develop unique competences to compete in international markets. When a company uses ﬁrm-addressable resources to create unique competences, they are able to respond to market changes more effectively, as the ﬁrm-addressable resources are more dynamic than the stable ﬁrm-speciﬁc resources. Despite of the growing amount of research, there is no coherent theoretical framework that could be used to explain and understand the internationalization of the high-tech ﬁrms (Sharma & Blomstermo, 2003). While the ﬁrms are required to be proactive and adaptive to act in dynamic business environments, the competitive advantages may be only temporary by nature. However, temporary competitive advantages have not been identiﬁed or researched within the existing internationalization research of even high-technology ﬁrms and their dynamic markets. Temporary competitive advantages within the RBV may well add value to the discussion of high-technology ﬁrms and their internationalization and international behavior.

The RBV on Internationalization The traditional resource-based approach to international business and internationalization emphasizes the role of distinctive competences as a basis for sustainable competitive advantage of the ﬁrm (Barney, 1991; Miller & Shamsie, 1996; Peteraf, 1993; Roth, 1995; Peng, 2001). Heterogeneity of ﬁrms and their resource endowments leads to different strategies and

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performance, due to differences in resource deployment, business activities, and learning capabilities. Similarly, heterogeneity is one of the reasons why the ﬂexible, idiosyncratic attributes of the ﬁrm play such an important role in the development of its activities and performance (Dierickx & Cool, 1989; Peteraf, 1993). Resources that are distinctive or superior to rivals’ resources may become the basis for (sustainable) competitive advantage and action. However, in order to serve as potential sources of sustainable competitive advantage, the ﬁrm’s resources must meet four requirements. As Barney (1991, pp. 105–106) writes, ‘‘To have this potential (of sustained competitive advantage) a ﬁrm resource must have four attributes: a) it must be valuable, in the sense that it exploits opportunities and/or neutralizes threats in the ﬁrm’s environment, b) it must be rare among a ﬁrm’s current and potential competition, c) it must be imperfectly imitable, and d) there cannot be strategically equivalent substitutes for this resource that are valuable but neither rare or imperfectly imitabley’’ Thus, ﬁrm-speciﬁc resources are ‘‘strategic’’ or ‘‘critical,’’ as opposed to the undifferentiated inputs of the traditional input–output ﬂow of organizational transformation processes. In other words, critical resource stocks are those that are nontradable (Barney, 1986), nonimitable, and nonsubstitutable (Dierickx & Cool, 1989). All other resource stocks can be considered tradable (Chi, 1994). Tradable resources can be used as a basis for action, but not as the basis for internationalization advantage (Fig. 1). Studies using the RBV (Ahokangas, 1998; Westhead, Wright, & Ucbasaran, 2001; Fahy, 2002; Sapienza, Autio, George, & Zahra, 2006) have approached the phenomenon of internationalization from the perspective of sustainable competitive advantage. This focus on ‘‘sustainability’’ does not reﬂect the reality among high-technology companies (e.g., D’Aveni, 1994)

Valuable Rare

Non-imitable

Sustainability of competitive advantage for internationalization

Non-substitutable

Fig. 1. The Traditional Resource-Based View of Resource Attributes Contributing to Competitive Advantage for Internationalization.

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where advantages that are thought to be sustainable become temporary. A resource-based approach gives the basis for suggesting that business processes that exploit ‘‘valuable but common resources can only be a source of competitive parity; business processes that exploit valuable and rare resources can be a source of temporary competitive advantage; and business processes that exploit valuable, rare and costly-to-imitate resources can be a source of sustained competitive advantage’’ (Barney, 1991; Ray, Barney, & Muhanna, 2004, p. 26). However, resources as such cannot be a source of competitive advantage. Resources need to be used through or in business processes to create competitive advantages (Porter, 1991; Eisenhardt & Martin, 2000). The RBV assumption of the sustainability of competitive advantage seems to be in contradiction with the reality of high-technology companies where sustainable competitive advantages have been seen as unlikely (D’Aveni, 1994; Eisenhardt & Martin, 2000). In dynamic environments, advantages that are thought to be sustainable become temporary and seemingly lose their relevance from the point of view of internationalization. Indeed, Eisenhardt and Martin (2000) argue that the RBV breaks down in dynamic and high-velocity markets where the duration of any competitive advantage is inherently unpredictable. The RBV assumes that valuable, rare, inimitable, and nonsubstitutable resources can contribute to the sustainability of advantage. This assumption can be made with regard to internationalization as well. Considering resources, sustainable competitive advantage refers to the implementation of a value-creating strategy that is not susceptible to duplication and is not currently implemented by competitors (Wernerfelt, 1984, 1995; Mahoney & Pandian, 1992; Barney, 1991; Amit Shoemaker, 1993; Peteraf, 1993; Oliver, 1997). The paradoxical point of this discussion is that internationalization, whether we see it as a process or as a strategy is a replication that is continuously implemented among established and emerging competitors. In addition, the above discussion leads one to think that internationalization lowers resources and ﬁrm heterogeneity which is in contrast with one of the core assumptions made within the RBV (Peteraf, 1993). Helfat and Peteraf (2003) argued that the RBV has failed to explain how heterogeneity arises. Arguments to the contrary have also been presented. On the one hand, for example, Oliver (1997) postulated that heterogeneity is the outcome of discretionary managerial choices, selective resource accumulation, and the deployment processes of ﬁrms because of the differences among ﬁrms’ resource selection and accumulation heterogeneity. On the other hand, Alchian and Demsetz (1972) argued that the very existence of

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ﬁrms can be explained by heterogeneity since it is the driving force that causes ﬁrms to exchange resources, which, in turn, creates collaboration and interdependency among ﬁrms. Finally, it can be asked whether all collaborative internationalization activities in ﬁrms are initiated with the purpose to overcome the liabilities of temporary advantages utilized by the ﬁrms in their efforts to internationalize.

DYNAMIC RESOURCE-BASED INTERNATIONALIZATION The dynamic RBV has its origins in Teece, Pisano, and Shuen’s (1997) deﬁnition of dynamic capabilities that involve adaptation and change through building, integrating, and reconﬁguring resources. In dynamic environments, the RBV has been used to explore why certain ﬁrms seem to have competitive advantages in situations of rapid and unpredictable changes (Eisenhardt & Martin, 2000). Dynamic capabilities can be characterized as simple, experiential, unstable processes that rely on quickly created knowledge and iterative execution; the outcomes of the processes are adaptive and unpredictable. However, if we are to capture and understand temporary competitive advantages in regard to high-technology ﬁrms’ internationalization, the traditional RBV thinking (that rare, valuable, nonimitable, and nonsubstitutable resources contribute to sustainability) cannot simply be turned around. This kind of argument has occasionally been presented in the research on the internationalization of high-technology ﬁrms, especially with regard to imitation. In some cases increased imitation by competitors has seemingly led to the acceleration of the process of international growth. Eisenhardt and Martin (2000) used the dynamism view to challenge the traditional RBV of competitive advantage by claiming that competitive advantage arises from valuable, somewhat rare, equiﬁnal, substitutable, and fungible dynamic capabilities (Fig. 2). Dynamic capabilities involve the creation of new, situation-speciﬁc knowledge by engagement in experiential, learning-by-doing actions. This view resembles the approach used by, e.g., Johanson and Vahlne (1977) and the internationalization reality of high-technology ﬁrms much more than the traditional resourcebased approach to sustainability. The dynamic capabilities view builds on two perspectives of change: (1) market dynamism and (2) evolution of resources, whether ﬁrm speciﬁc or ﬁrm addressable to the ﬁrm (Oliver, 1997; Eisenhardt & Martin, 2000;

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Valuable Somewhat rare Equifinal

Sustainability of competitive advantage for internationalization

Substitutable Fungible

Fig. 2. The Dynamic Resource-Based View of Resource Attributes Contributing to Competitive Advantage for Internationalization. Development of temporary competitive advantage for internationalization

Resource evolution +

Market dynamism + Point of selection

Fig. 3.

Resource accumulation lag

A Dynamic, Resource-Based View on the Development of Temporary Competitive Advantages for Internationalization.

Helfat & Peteraf, 2003; Schreyo¨gg & Kliesch-Eberl, 2007; Pacheco-Almeida, Henderson, & Cool, 2008) (Fig. 3). The discussion on market dynamism within the dynamic capabilities approach of the RBV can be summarized by stating that the higher the dynamism of the market, the more unpredictable, volatile, and temporary competitive advantages become. Making this assumption, the processes of internationalization and the competitive advantages required for internationalization should also become more volatile, unpredictable, and emergent by nature as the dynamism of the market increases. From the perspective of competitive advantage and internationalization,

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some notions concerning dynamic capabilities (Schreyo¨gg & Kliesch-Eberl, 2007) even suggest that the capabilities may become obsolete in highly dynamic markets. Previous discussion concerning the evolution of resources has looked at capability life cycles (CLC). Helfat and Peteraf (2003) deﬁned three original stages in the CLC: founding, development, and maturity. But, the branching of capabilities, which emerge during the life cycle is often of greater interest. After a selection event, the capabilities may become retired (dead), retrenched (gradually declined), renewed (improved), replicated (in a different market), redeployed (in a different productmarket), or recombined (with another capability). All these stages and their related internationalization activities can also be found within the existing internationalization process research. In addition, Pacheco-Almeida et al. (2008) discuss resource accumulation lags that they deﬁne as the average time a ﬁrm needs to accumulate the resources to produce one unit of output in a product-market of interest. If seen from the CLC point of view, this lag starts after the point of selection and ends as the resource contributes to the competitive advantage and activities of the ﬁrm. Again, assuming these notions of resource evolution, it might be argued that as resources evolve, their heterogeneity increases and the competitive advantages based on them become more unpredictable, volatile, and temporary. Sustainable competitive advantages, in turn, can be argued to emerge as the effects of market dynamism and resource evolution decrease, or as their determinants lose relevance in competitive situations (Fig. 4). Emergence of sustainable competitive advantage for internationalization

Resource evolution

Market dynamism

The era of sustainable competitive advantage in internationalization

Fig. 4.

-

The Emergence of Sustainable Competitive Advantage for Internationalization.

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To sum up the preceding discussion, we argue that from the RBV market dynamism and resource evolution determine whether temporary or sustainable competitive advantages may arise from the activities of the ﬁrm, and determine to what extent and in what way do competitive advantages remain temporary or sustainable. Indeed, it might be argued that all competitive advantages are initially temporary by nature. The fact that some resources and advantages end up becoming sustainable is the outcome of managerial selection and competition, followed by the resource accumulation lag, and conditioned by the determinants of market dynamism and resource evolution. Sustainability emerges as market dynamism and subsequent resource evolution decrease. As a result, companies face much less pressure to look for and utilize new, short-term or temporary advantages. Instead, they can rely on their existing, already emerged advantages in their attempts to internationalize. This kind of approach to temporariness and sustainability makes it possible to empirically identify the threshold between temporariness and sustainability; it is no longer a problem in which the answer must be found within the company, but instead the answer can be found within the business context, i.e., revealed by the customers and business environment. In the following part of the paper, our aim is to analyze the dynamic resource-based approach in the context of hightechnology internationalization.

DATA ANALYSIS AND METHODOLOGY The methodology of this paper is based on the triangulation of three perspectives: the RBV, the case research approach, and the data collection and analysis points of view. Regarding the RBV, we aim to contribute to the RBV by approaching the research focus in a way that is realistic, valid, and nontautological (Eisenhardt & Martin, 2000). Rouse and Daellenbach (1999) argue that a ‘‘thick description’’ of the case company data that combines a strong company internal view, with strategy, process, and business environment data, and a company external view through market data acquired by the company is needed for contributing to the RBV. Our arguments are empirically explored in a single explorative, historical case study. This method enables research of a complex phenomenon. Eisenhardt (1989) emphasizes that case study research contains beneﬁts in creating and developing new theoretical models: empirical validity, testability, and novelty of the results. The empirical data were collected longitudinally during 2000–2007, and the research setting provides a deep

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understanding about the determinants behind the company actions (Langley, 1999). The longitudinal nature of the study enables the study of change over time (Pettigrew, 1992; Langley, 1999; Saunders, Lewis, & Thornhill, 2003), reﬂecting the evolution of resources and the dynamism of markets. The use of multiple data sources improves the validity of case study research, and triangulation was used to strengthen the research by combining methods, using several kinds of data, and using multiple theoretical perspectives (Yin, 2003). The research approaches the phenomenon through different theoretical discussions in order to develop the framework of the study. The data of the research consists of the original planning documentation developed or acquired by the case company. Following Eisenhardt (1989), we link our ﬁndings to the existing literature and thereby check the internal validity, the generalizability, and the theoretical level of the research. In addition, this paper can be seen as self-ethnographic (Alvesson, 2003) to some degree, as one of the authors was working in the case company during the observation period, being responsible for the strategy processes in the company.

CASE: THE GLOBAL TEST AND MEASUREMENT SECTOR The ‘‘global test and measurement sector’’ which services the converging/ mobile telecommunications networks industry grew remarkably during the late 1980s and throughout the 1990s due to the emergence of GSM and CDMA technologies. By 2001, the maturation of telecommunication technology and the whole industry resulted ﬁrst in large-scale layoffs, and as a result the test and measurement tool sector faced a decrease in the total demand for their tools and services. However, there were several subsegments within the test and measurement tool sector that continued to grow. For example, the GSM technology updates, such as GPRS and EDGE, required new test tools. Within the whole telecommunications industry the highest expectations were placed on 3G technologies such as WCDMA (sometimes also referred to as UMTS). However, WCDMA technology never boomed the way GSM did and the demand for new test and measurement tools gradually decreased. During 2005–2007, all the big players within the mobile telecommunications industry entered an era of mergers, acquisitions, and cooperative arrangements resulting in a large-scale industrial restructuring. Similar activities were soon started within the test and measurement sector.

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Table 1. Some Business Drivers within the Telecommunications Test and Measurement Sector in 2000 and 2007 (Case Company Data). Business Drivers in 2000

Business Drivers in 2007

þ Growth in the number of mobile subscribers þ Increased functionality and complexity of mobile networks þ R&D investments among customers

Mergers and acquisitions among customers and competitors Number of parallel similar R&D efforts among customers þ/ Convergence and interoperability of existing technologies and services Market shift toward low-cost developing countries Speed of emergence and number of new technologies

þ Speed of emergence and number of new technologies þ Technology push from network vendors to operators

The business drivers, positive or negative, within the test and measurement sector changed remarkably between 2000 and 2007. In addition, the two-digit growth rate of the telecommunications industry in the 1990s slowed down. The competitive advantages required for entering the test and measurement business and for remaining proﬁtable in the international markets changed in parallel with the change in business drivers (Table 1).

The Case Company and its Internationalization The case company is one of the leading test and measurement tool and service providers within mobile telecommunications, focusing on GSM, WCDMA, and related (converging) technologies worldwide. Founded in 1991, the company grew from domestic software subcontracting to international, software-based test tool markets by focusing ﬁrst on individual customers and later by attracting customers worldwide by its low-cost, high quality test tools and ﬂexible and committed customer service. The products and services developed by the case company can be characterized as technologically cutting-edge, high-technology, software-based test tools built especially for testing the newest mobile technologies being developed by its customers. During 1991–2007, the company became international in four partly parallel steps. The ﬁrst step was characterized by direct sales and support to end customers in Asia and Europe (1993–1996).

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The second step, internationalization through resellers, began in 1996 in Europe parallel to export sales, and continued until 1999, gradually increasing the number of countries served by the resellers in Europe and Asia. By late 1999, the company started its third step of internationalization and began to establish sales and customer service ofﬁces, ﬁrst in Nordic countries, later in Eastern Asia, Western Europe, and North America. Five new sales sites were opened during a period of two years, 2001–2002, one of them being a joint venture, and each of the sites reached proﬁtability within six months of their founding. The ﬁnal step, international acquisition, took place in 2005 when the case company acquired a US-based company that had offshore outsourcing units in India. As a result, the sales of the company exceeded h30 million. The case company had practiced acquisition in the domestic markets in 2000 when it acquired another company, which doubled the number of employees in the case company and brought three new sites into its possession. Overall, during 2000–2007 the company grew over ﬁvefold in terms of total sales and number of employees. In 2000, the company had only one site, but gradually the number grew to 13 and the company had sites in nine countries worldwide. At the same time, the proportion of international sales and employment outside the domestic markets grew even more. The company grew mainly by winning market share from competitors, and the acquisition made in 2005 brought in complementary product offers to the same customer groups the case company had been servicing. By the end of the observation period, the case company had reached the number two position globally in both of its main business areas.

Development of Market Dynamism As the short description of the industry indicated, the globalizing mobile telecommunication market went through dramatic changes during the period of observation. As offshore outsourcing increased, the case company’s customers shifted their R&D activities from developed to developing countries. The maturation and convergence of technologies brought increased competition in terms of pricing, emergence of new local competition, and new technological challenges. At the later stages of the observation period, the number of customers decreased due to the mergers, acquisitions, and other cooperative arrangements among them. The era of the technology push by telecommunication infrastructure vendors ended as

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the speed of mobile operators’ investments in new technologies decreased. This overall decrease in demand resulted in a zero-sum game of diversiﬁcation efforts by the competing test and measurement tool providers: each of the players tried to win market share by developing new products for testing purposes that they had not covered before, thus stepping on the toes of their competitors. Overall, the proﬁtability of the test and measurement companies decreased considerably during 2000–2007. As an outcome of all the changes in the market, the biggest players in the test and measurement tool sector started acquiring smaller ﬁrms. As a response to these changes in the markets, the case company adopted a strategy according to which it focused on servicing the biggest customers (as they represented the greatest potential in the market), emphasized local service and sales in each major market through own ofﬁces and selected value added resellers, sharpened product strategy through careful selection of R&D efforts, developed a new multi-technology platform for its best selling product line, acquired a company to complement its product offering, and pruned costs by exploiting its own development ofﬁce in India. As a result of these efforts, the company has been able to permanently keep its proﬁtability level above that of most competitors. This was done in a situation in which global demand decreased over 20% a year during 2005–2007.

Evolution of Resources From the resource evolution point of view the seemingly logical and straightforward strategy adopted by the case company was not a smooth process. As the number of employees and workings sites increased during 2000–2005, a lot of effort was required to keep the internal organization, efﬁciency, and working processes at adequate levels. The globalization of internal processes and reporting systems – ISO9001, CMMI, P-CMM, and an ERP system – across all sites in Europe, Asia, and America required continuous planning, implementing, modiﬁcation, and development work. Organizational restructuring and reorganization occurred frequently in the case company. Changes in decision-making procedures, delegation of authority, and leadership issues in new cultural and national environments caused increasing friction, internal conﬂicts, and misunderstandings inside the case company. Despite these difﬁculties, the case company gained experience in dealing with and solving these issues. The core processes of the case company, product creation and demandsupply, embodied the key competences throughout the organization.

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From the moment of the founding of the company, the competences of the company and its founding team included (1) deep understanding of the content and functionality of mobile telecommunications networks and technical protocols used in them; but more importantly, (2) through the management process, strategy process, and close customer relationships with the key customers, the company was able to continuously maintain and develop its unique technical capabilities as new generations of technologies emerged, were standardized, and developed by the industry. The company paid careful attention to nurturing these two competences.

Development of Temporary Competitive Advantages In the process of the internationalization of the case company, new capabilities were emerging through experiential learning as new internal and external technologies were adopted and new customers were attracted worldwide. The main practices of identifying and developing capabilities were twofold. The majority of the identiﬁcation and development was done by the company’s work teams and by ad hoc or continuous (process) development work groups. The strategy process of the company was used as a medium to coin the capabilities, and discuss which of the capabilities needed special attention and identify which ones can lead to competitive advantages for the ﬁrm in the international markets. Capabilities, in general, were developed from skills, resources, and procedures that were needed for the successful completion of the tasks required from the work groups. The typical question asked in the case company concerned what knowledge was needed for being able to implement this or that technical protocol or functionality into the product. Technical mastery combined with the capability to implement things was considered very important in the company. As an outcome, over the years the company developed a unique set of technical capabilities that typically could be used to serve customer needs for only a limited period of time. The reason for this temporariness was the nature of the company’s business: the network equipment vendor customers were buying new test tools only for new things that they were testing. There was no need to test old features or protocols that were already implemented into the mobile network, except regarding the interfaces between the new and old technologies. Thus, the case company was also scanning the horizon for future and coming technologies all the time. Only the mobile operators were buying some ‘‘old’’ test tools for monitoring purposes.

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From the customer’s perspective, the capabilities required for successful sales and customer service were developed through marketing and sales activities. In marketing, technical information and reliability played a crucial role, as the customers’ decision making was based on the test and measurement tool providers’ ability to perform the required testing. Increasing the professionalism of the marketing documentation was required as the company continued its international growth. From the sales perspective, competent, local sales and technical support personnel were required in all sales sites of the case company. To enhance the connection between technical and customer-related capabilities, the company appointed product managers whose responsibility was to ensure that the R&D function knew about and understood customer needs and that the customers could verify the technical expertise of the case company, meaning that product managers supported the sales personnel in the customer interface. These product managers, supported by the business unit managers, were the key personnel in the company; failure in that position would have been disastrous for the company. The requirements and expectations placed on these key personnel were high: technical mastery combined with excellent international sales, marketing, presentation, and negotiation skills. Crucial to the business success was the ability to create solutions for the customers and transfer capabilities through the customer-technology interface.

Emergence of Sustainable Competitive Advantages Over time some of the technical and procedural/process-based and processembedded resources were found to have competitive value across new technologies and technology generations. Originally, technology was considered to be the source of the sustainable competitive advantage, but this turned out to be only a partial explanation. As all competitors had access to the same technologies, technical capabilities over the functionality of single network elements or protocols were seen as temporary competitive advantages. The short-term requirements of the customers determined what protocols and functionality would be tested in the near future, but if you could convince the customer to buy your technology platform for the new, emerging technology, the customer would use your technology across all the forthcoming upgrades. This meant that if the customer selected the case company as the test tool provider for GSM, the related forthcoming upgrades such as GPRS and EDGE were also much easier to sell. Thus, a deep understanding of the functionality of the whole network was found

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to create long-lasting effects in the products and customer relationships of the case company, leading to sustainable competitive advantage. Second, another process-based, long-lasting competitive advantage that the company identiﬁed was its ability to create ﬂexible products instead of short-term customer-tailored services. The business development thinking adopted by the company was to avoid separate, single client projects. Instead, the company implemented the new customer requirements into its existing products and product platforms and sold the created solution as a product to all its customers. This managerial philosophy hindered the company from entering and diversifying into new lines of businesses, but enabled it to attract new customers worldwide, remarkably contributing to the accelerated internationalization of the company. The third sustainable advantage was attained by the case company as the ability to develop and maintain its market position as a trusted and committed test and measurement provider to its customers. The move from an insigniﬁcant provider to a key player in the oligopolistic testing equipment markets required expertise and ﬂexibility from the organization in its activities toward the customers. Unlike several other high-technology companies, the network of the company consisted mainly of customers and a few select value added resellers and a couple of technology providers. Other network partners were seen as extensions of the case company, taking care of certain externalized functions of the ﬁrm.

DISCUSSION This paper has focused on resources and competitive advantages, both temporary and sustainable, in the context of internationalization of hightechnology ﬁrms. The basic research setting and intended primary area of contribution for the paper is the resource-based approach in the context of international business and internationalization. The dynamic RBV deals with the development of resources and capabilities over time in interaction with the market, thus suggesting that the evolution of resources and capabilities are the prime components of developing competitive advantages for internationalization. The dynamism of the market appeared to be the fundamental driver for the strategy and internationalization of the case company. As the telecommunications market globalized, the case company also faced the need to serve the globalizing customers close to them. The outcome of the maturation process of the whole industry induced fundamental changes

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in the strategy and competitive situation of the company. It can be concluded that the fundamental strategy of the ﬁrm was tuned in to identifying and exploiting changes in the market, and based on anticipated changes; the company strived to develop internal resources to support growth and internationalization. In line with earlier studies, the networks of the company, especially in terms of customers, played an important role in the internationalization. The customers provided the case company with opportunities to which the companies were required to respond through their products and services. As the company grew, control and systematic development over the internal processes became increasingly important. In an attempt to answer the ﬁrst research question (the impact of temporary competitive advantages on internationalization), the evidence and ideas emerging from the data provide a basis for several arguments. The temporary technological advantages created by the case company were in the short term a major driver for international growth: the technology-related resources and capabilities developed by the company enabled it to win business cases from existing customers as well as to open up new customer relationships in international markets. The windows of opportunity for selling technology-based solutions to customers were frequently emerging but short-lived. The new customer relationships enabled the case company to win market share from their competitors by exploiting the typically shortlived technical or process-related advantages in an opportunity-driven style. The basis for the learning was experiential as the initiating force triggering the development of temporary competitive advantages was the customer. The second research question concerned how temporary competitive advantages emerge from within the internationalization of high technology. The case company attained temporary competitive advantages through customer relationships. In dynamic markets, learning from customer needs beneﬁted the development of competitive advantages signiﬁcantly. The companies developed their resources and competitive advantages by building on learning form networks, and redeployed those resources in other markets. During the period of high international growth, the company coordinated and standardized their internal processes to respond to the needs of the global and dynamic environment, thus changing the ways of servicing the international customer. The third research question concerned the relationship between temporary and sustainable competitive advantages in the internationalization of the high-technology ﬁrms. The company identiﬁed and valued certain technical and customer-related resources and capabilities as sources of long-term, sustainable competitive advantage. The company developed sustainable

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competitive advantages internally, partly by building on what they had learned from the customers, through their internal processes. But, more importantly, if certain resources were identiﬁed to be the basis for sustainable competitive advantage, they were nevertheless ﬁrst seen as temporary, partly due to the dynamism and frequent changes of the markets. If a resource was found to help to maintain the company’s position in the markets over the typical length of several technological market opportunities, that resource was seen as sustainable. The length of the window of opportunity serves as a criterion for determining the sustainability of a resource. From the internal perspective of the company, it appears that temporary competitive advantages can be transformed into sustainable ones with the help of internal advantages. Based on the empirical ﬁndings, it can be concluded that competitive advantages have a life cycle that, starting from the point of selection and subsequent resource accumulation lag, includes a point where advantages, originally regarded as or planned to be temporary, become sustainable. When resource evolution and market dynamism are high in the life cycle, the temporary competitive advantage occurs. The temporary competitive advantages were replicated in other markets and customer relationships, and later on, these competitive advantages were redeployed in other product markets too. However, it can be argued that as the resources and related competitive advantages become sustainable, the dynamism of the market decreases. The outcome of this evolution is also decreased unpredictability and volatility of the market (Fig. 5). One might also argue that this kind of

Evolution of competitive advantages from temporary to sustainable Resource evolution

Market dynamism Resource accumulation Lag

Fig. 5.

The era of temporary competitive advantage

The era of sustainable competitive advantage

The Evolution of Competitive Advantages from Temporary to Sustainable in Internationalization.

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decreased evolution of resources and market dynamism favors bigger ﬁrms in their efforts to control the markets. Regarding resource and competitive advantage life cycles, the founding, development, and maturity stages of evolution can be seen as fundamental features of resource evolution. The resources that contributed to competitive advantages were renewed, replicated, redeployed, or recombined to enhance growth and market share in internationalization. Retrenched or retired resources did not emerge as crucial in the data. In summary, temporary competitive advantages appear important for the internationalization of high-technology ﬁrms. They can be used for opening up and exploiting opportunities in markets. Temporary competitive advantages in internationalization may become sustainable through the coeffects of market dynamism and the processes of resource evolution.

NOTE 1. High-technology ﬁrms (including both SMEs and entrepreneurially oriented high-technology ﬁrms regardless of size) can be seen as a speciﬁc area of its own within the internationalization research (Coviello & Munro, 1995, 1997; Oviatt & McDougall, 1994, 2004; Komulainen et al., 2006).

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RELATIONAL QUALITY, ALLIANCE CAPABILITY, AND ALLIANCE PERFORMANCE: AN INTEGRATED FRAMEWORK Koen H. Heimeriks and Melanie Schreiner ABSTRACT Building on the complementarity nature of extant dyadic and portfolio level alliance research, this paper discusses the role of alliance capability and relational quality as antecedents of alliance performance. Although prior research focused extensively on the inﬂuence of dyadic issues on alliance performance, more recent studies focus on ﬁrm-level capabilities to manage sets of alliances. We specify an integrated framework that merges these two previously separated streams of research and discuss how ﬁrm-level alliance capabilities affect dyadic level relational quality. The framework suggests that relational quality mediates between both alliance capability and alliance performance and provides a detailed discussion on how ﬁrm-level mechanisms improve the quality of dyadic relationships. We also discuss implications and options for future research.

Enhancing Competences for Competitive Advantage Advances in Applied Business Strategy, Volume 12, 145–171 Copyright r 2010 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1108/S0749-6826(2010)0000012009

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INTRODUCTION The last two decades have seen an unprecedented surge in strategic alliances (Harbison & Pekar, 1997; Hergert & Morris, 1988; Narula & Hagedoorn, 1999) that has been accompanied by a parallel increase in scholarly work on the phenomenon (for reviews see, e.g., Barringer & Harrison, 2000; Gulati, 1998; Shenkar & Reuer, 2006). Drawing upon various theoretical angles, for instance, transaction cost (TC) economics, economic sociology, strategic management concepts, and social psychology, earlier work in the ﬁeld mostly concentrated on factors contributing to the success of individual alliances taking the dyad as a unit of analysis (e.g., Borys & Jemison, 1989; Harrigan, 1988; Kale, Singh, & Perlmutter, 2000; Parkhe, 1993; Zaheer, McEvily, & Perrone, 1998). However, as numbers of strategic alliances formed by single ﬁrms are increasing, researcher’s focus has gradually shifted to the alliance portfolio level, driven by the observation that some ﬁrms consistently derive greater value from their set of alliances than other ﬁrms. Academics and practitioners have explained this ﬁnding by suggesting that such ﬁrms possess superior alliance capabilities (Anand & Khanna, 2000; Heimeriks & Duysters, 2007; Kale, Dyer, & Singh, 2002). As alliances are becoming important in the context of ﬁrms’ strategies, this capability is widely seen as a source of competitive advantage for ﬁrms (Dyer & Singh, 1998; Ireland, Hitt, & Vaidyanath, 2002). The literature focusing on alliance capability has evolved in two broad streams (Schreiner, Kale, & Corsten, 2009): the ﬁrst one investigates primarily how ﬁrms develop alliance capability, i.e., through what mechanisms alliance experience and knowledge transform into repeatable patterns of activity (Anand & Khanna, 2000; Heimeriks & Duysters, 2007; Kale et al., 2002; Kale & Singh, 2007). One underlying argument implicitly refers to learning curve effects proposing that ﬁrms develop such capabilities as a by-product of repeated allying and learning-by-doing (Anand & Khanna, 2000; Hoang & Rothaermel, 2005; Rothaermel & Deeds, 2006; Simonin, 1997; Zollo, Reuer, & Singh, 2002). However, mixed evidence for this rather simple reasoning (Kale & Zollo, 2006) has led to a second line of thought that emphasizes ﬁrms’ deliberate learning attempts to capture, share, and disseminate alliance management experience and knowledge throughout the ﬁrm in order to consolidate and leverage the ﬁrms’ alliance knowledge base (Dyer, Kale, & Singh, 2001; Heimeriks & Duysters, 2007; Kale et al., 2002; Kale & Singh, 2007). These studies specify a range of learning mechanisms and argue that those allow the ﬁrm to improve its alliance capability. They also provide empirical evidence that such learning improves alliance

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performance explaining the considerable ﬁxed ﬁrm effects in individual ﬁrms’ performance at the portfolio as well as individual alliance level. The second stream of research on alliance capability concentrates on what elements speciﬁcally constitute a ﬁrm’s alliance capability (Gulati, 1998); on the one hand scholars investigate capabilities to manage an entire portfolio of alliances (Hoffmann, 2007) and on the other they look at capabilities to manage any individual alliance (Argyres & Mayer, 2007; Geringer, 1991; Hitt, Dacin, Levitas, Arregle, & Borza, 2000; Oxley, 1997; Schreiner et al., 2009). While the former mostly investigates issues such as how to conﬁgure a portfolio, achieve synergies, or avoid tension between alliances, the latter examines capabilities for the formation, structuring, and ongoing management of any individual alliance, for instance partner selection, devising appropriate contracts, and coordination, communication, or bonding skills once the alliance is up and running. Again, both lines of thought argue and provide empirical evidence that ‘‘alliance portfolio capability’’ as well as ‘‘alliance management capability’’ improve ﬁrm performance at both levels of analysis. The research on alliance capability is undoubtedly very useful, but it does neglect the dyadic nature of alliances. With its theoretical underpinnings in the capabilities- and competence-based view of strategic management, both strands of research are strongly focused on the individual ﬁrm as a unit of analysis and link individual capabilities with individual performance. However, earlier alliance research based on transaction cost and agency economics as well as the dynamic, process-oriented interaction, trust, and social embeddedness perspectives (for reviews see, e.g., Barringer & Harrison, 2000; Gulati, 1998) emphasized and examined issues related to the genuine dyadic nature of alliances. This research explicitly accounts for the fact that alliance performance or success is a result of dynamic processes in which both partners are involved and that characterize the alliance itself. In alliances beneﬁts are realized by mutual adaptation and ﬁne-tuning of both partners and each party’s performance in an alliance is at least partly contingent upon and interdependent with the other party’s actions (Arino & De la Torre, 1998; Doz, 1996; Ring & Van de Ven, 1994). Furthermore, this research provides evidence that dyadic level concepts such as levels of commitment, trust, information sharing and communication, and conﬂict are important antecedents to individual ﬁrms performance in alliances (e.g., Johnson, Cullen, Sakano, & Takenouchi, 1996; Kanter, 1994; Lin & Germain, 1998; Mohr & Spekman, 1994; Young-Ybarra & Wiersema, 1998). The importance of these dyad level concepts is also reﬂected in general models of alliance performance assessment in which relational and process measures on the dyadic level are intermediate alliance outcomes

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(Arino, 2003; Olk, 2006). Unfortunately, research that has been done on alliance capability with its focus on the individual ﬁrm has made few attempts to integrate its ﬁndings with the earlier work mentioned above. Furthermore, it seems that the theoretical mechanisms by which alliance capabilities affect alliance performance can only be clariﬁed by taking into account what happens at the dyadic level of the alliance. In this paper, we attempt to enrich the literature on alliance capability by investigating the link between individual ﬁrms’ alliance capability and performance in more detail. We do so by drawing upon and linking literature generally concerned with alliances as a dyadic phenomenon to the ﬁrm and the more recent alliance capability focused research. Therefore, this paper investigates how learning mechanisms underlying organizational alliance capabilities exert inﬂuence at the individual alliance level. We suggest that the positive relation between a ﬁrm’s alliance capabilities and performance is based on positive effects of the capability on dyadic level process and relational measures of any individual alliance. In other words, taking into account alliance and portfolio level capability research, we propose that ﬁrms using learning mechanisms foster relational quality in every single alliance of their portfolio which in turn enhances each alliance’s performance.1 The overall effect will be that ﬁrms having an alliance capability outperform competitors in their alliance activity. This paper highlights the processes and mechanisms through which this transformation of alliance capability into alliance performance comes about through improved relational quality. Hence, by stipulating the relationship between learning mechanisms, relational quality, and alliance performance, this paper aims to bring together two strands of alliance research, which were previously studied separately (i.e., dyadic and alliance portfolio research). The paper is organized as follows. First, we discuss the main building blocks of our model, alliance performance and relational quality as well as alliance capability. After that, we investigate the mechanisms through which alliance capability and relational quality inﬂuence alliance performance. Finally, we discuss implications of the model and avenues for future research to test this relationship empirically and further theorizing in the area of alliance capability and alliance portfolio research.

THEORETICAL BACKGROUND Early alliance research relied on transaction cost and traditional industrial organization (IO) theory arguments. Alliances research treated alliances as

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single transactions between industry rivals in need to overcome market failure (Williamson, 1991) and alliances were viewed as separated business cases that were to be studied primarily from a dyadic perspective (Vassolo, Anand, & Folta, 2004a). In general, there was a strong tendency to analyze structural properties of alliances such as governance mode, partner composition and ﬁt etc. They were assumed to imply certain contractual hazards and safeguards against opportunistic behavior by the partners and ﬁnally affect alliance performance. In addition, many researchers investigated speciﬁc alliance and relationship properties as antecedents to the performance of the alliance and the partners. Among the most often studied key features of successful alliance relationships are trust, commitment, communication and information sharing, and conﬂicts (e.g., Johnson et al., 1996; Kanter, 1994; Lin & Germain, 1998; Mohr & Spekman, 1994; YoungYbarra & Wiersema, 1998). More recently, with the advent of the resource- and competence-based view (e.g., Sanchez, Heene, & Thomas, 1996), alliances were increasingly acknowledged to provide access to speciﬁc resources of partner ﬁrms enabling ﬁrms to leverage competitive advantages. Various studies have focused on a ﬁrm’s ability to acquire partner resources through the alliance (Das & Teng, 2000; Hamel, 1991; Khanna, Gulati, & Nohria, 1998; Madhok & Tallman, 1998), thereby assessing the achievement of objectives by individual partners (e.g., Jap, 2001; Kale et al., 2000). This led to analyses comparing partner ability to learn and internalize partner resources to ‘‘outlearn’’ the partner (Hamel, Doz, & Prahalad, 1989). However, with the spurt in alliance activity continuing in the last decade, many ﬁrms found themselves managing an increasingly large alliance portfolio (Barney, 1997; Doz & Hamel, 1998) in order to get access to the desired resources and achieve sustainable competitive advantage. The observation that some ﬁrms do much better with their alliances than others, led researchers to question why some ﬁrms continuously outperform competitors in their alliance activity at the individual alliance as well as the portfolio level; hence, research in individual ﬁrms alliance capabilities sparked at the alliance and portfolio level (Heimeriks, Duysters, & Vanhaverbeke, 2007; Hoffmann, 2007; Kale et al., 2002; Kale & Singh, 2007; Rothaermel & Deeds, 2006; Schreiner et al., 2009; Vassolo, Anand, & Folta, 2004b; Blomqvist & Levy, 2009). With the evolution of alliance research over time the type of performance measures has also evolved. At the dyadic level, early studies measured performance most often based on stability criteria including duration or termination. As the meaning of these measures can be ambiguous, they became increasingly replaced by measures of ﬁnancial performance.

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Yet, these measures are plagued with their own problems (Arino, 2003; Olk, 2002) and often hard to come by. Hence, relationship properties, e.g., levels of commitment, trust, information sharing and communication, and conﬂict (e.g., Johnson et al., 1996; Kanter, 1994; Lin & Germain, 1998; Mohr & Spekman, 1994; Young-Ybarra & Wiersema, 1998), that have been theoretically and empirically established as antecedents of success were increasingly used as performance measures. In line with this, the relational performance is sometimes referred to as the creation of relational rents (Lane & Lubatkin, 1998), relational capital (Kale et al., 2000), or collaboration-speciﬁc rents (Madhok & Tallman, 1998). At the alliance level as well as at the individual ﬁrm level, strategic and operational goal fulﬁlment were also used to complement or replace ﬁnancial and relational measures. When it comes to the measurement of alliance portfolio performance, the dominant approach has been to combine the performance of each single alliance measured with various types of indicators by forming an average score (Hoang & Rothaermel, 2005; Kale et al., 2002) or by measuring the ﬁrm’s overall success rate in the portfolio (Heimeriks et al., 2007).2 In an attempt to bring some order into the various performance measures used in alliance research, Olk (2006) proposed a model of the relationships among them. Based upon and following the ample literature, he proposed that process and relational performance measures at the dyadic level serve as ongoing outcomes of alliances, which in turn positively inﬂuence outcome event indicators such as ﬁnancial outcomes or stability, termination, and duration. The argument states that these ongoing measures capture the nature of the interaction between partners and how effective an alliance actually operates in terms of overcoming competitive differences and realizing the value-creation potential of the alliance (Olk, 2006, p. 404). Although not explicitly addressed in this framework, the model’s logic entails that individual ﬁrms’ ﬁnal alliance outcomes are dependent on the state of affairs in the dyad, and that the overall performance of the ﬁrm with its alliance activity is an average of the performance in each single alliance. Hence, while the development and maintenance of a healthy alliance relationship as captured by process and relational measures is not an end in itself, it is a necessary precondition for realizing ultimate strategic or ﬁnancial goals. This implies that each antecedent factor to alliance performance should be evaluated for its potential to affect the dyadic alliance relationship, i.e., the process and relational nature of an individual alliance. This would also include an alliance capability that consists of learning mechanisms that help companies to manage each individual alliance and its entire alliance portfolio in superior ways. While various

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Alliance capability

Fig. 1.

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Alliance performance

An Integrated Framework for Alliance Performance.

scholars have empirically conﬁrmed the positive relationship between individual ﬁrm’s alliance capabilities and alliance performance (Anand & Khanna, 2000; Cyert & March, 1975; Kale et al., 2002; Rothaermel & Deeds, 2006; Schreiner et al., 2009; Simonin, 1997; Sivadas & Dwyer, 2000), their effects in a single alliance – and in particular accounting for the dyadic nature of alliances – are tapped at best at the surface. Yet, we argue that for an enhanced understanding of the inﬂuence of alliance capability on performance, the mechanisms by which alliance capabilities inﬂuence the quality of the alliance process and relationship as the alliance evolves needs clariﬁcation. Hence, we propose the framework as presented in Fig. 1 that will guide our investigation of this relationship. First, it suggests that relational quality positively inﬂuences alliance performance. Second, alliance capability is postulated to enhance alliance performance. Third, we propose that relational quality is a mediator between alliance capability and alliance performance. The next sections will discuss each consecutive relationship between these three items of the framework.

RELATIONAL QUALITY AND ALLIANCE PERFORMANCE Prior alliance research focusing on the dyad has generally applied two complementary theoretical perspectives to conceptually and empirically study alliances (e.g., Cullen, Johnson, & Sakano, 2000; Das & Teng, 2001; Kale et al., 2000; Mohr & Spekman, 1994; Parkhe, 1993; Young-Ybarra & Wiersema, 1998): (1) economic theories like transaction cost, agency theory, or game theoretic approaches have been used to determine favorable conditions and contingency approaches for design and governance structures of alliances; (2) adapting relevant concepts from the social psychology and organizational behavior literature, others focused on patterns of social interaction and exchange, which occur within the process of allying, to explain alliance performance. Because alliances are inherently an intergroup

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and even interpersonal phenomenon (Li & Hambrick, 2005; Ring & Van de Ven, 1994), it is argued that alliances which are able to overcome divisive tendencies and negative interpersonal and intergroup dynamics are likely to be more successful. Aulakh, Kotabe, and Sahay (1996), for instance, argue that positive interaction is conducive to the success of international joint ventures. In the same vein, the main process models of relationship development highlight the role of positive pattern in repeated cycles of interactions for the viability and success of alliances (Arino & De la Torre, 1998; Doz, 1996; Kumar & Nti, 1998; Ring & Van de Ven, 1994). The potential that an existing relationship is healthy and will be maintained in the future is manifest in several distinct, yet related process and relational measures also referred to as relational quality (Olk, 2006). Relational quality is seen as an outcome of the interaction between partners (Arino & De la Torre, 1998; Olk, 2005). Although there is no concluding consensus on the deﬁnite constructs underlying relational quality, most researchers identify commitment, trust, information sharing and communication, and conﬂict as core components (Arino, De la Torre, & Smith Ring, 2001; Dwyer, Schurr, & Oh, 1987; Kale et al., 2000; Yli-Renko, Autio, & Sapienza, 2001). Therefore, we include these critical factors in the present model as representing relational quality that determines the operational well-being of an alliance. Commitment refers to the willingness of the partners to exert effort on behalf of the relationship (Porter, Steers, Mowday, & Boulian, 1974). Thompson (1967, p. 35) acknowledged that cooperative strategies rest on ‘‘the exchange of commitments.’’ By an initial commitment of resources, one party takes the initiative to enter into a cooperative endeavor. When the other party responds favorably, the relationship can develop in a reciprocal cycle of commitments. Anderson and Weitz (1992) acknowledge that commitment goes beyond a simple, positive evaluation of the other party based on a consideration of the current beneﬁts and costs associated with the relationship. It includes the adoption of a long-term orientation toward the relationship – a willingness to make short-term sacriﬁces to realize longterm beneﬁts from the relationship. The effect of commitment on performance has been speciﬁed as operating through two mechanisms: ﬁrst, mutual commitment increases mutual dependence which implies a deterrence from opportunistic behavior by partners and is associated with superior coordination of interdependent activities that increase joint productivity (Zajac & Olsen, 1993). Various studies have found empirical support for this relationship (Holm, Eriksson, & Johanson, 1999; Mohr & Spekman, 1994). In addition, commitment involves the investment in relation-speciﬁc, non-recoverable

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assets in the alliance. This investment is needed to create a signiﬁcant specialization, which in turn lead to a competitive differentiation potential and enhances the likelihood of signiﬁcant value creation (Dyer & Singh, 1998; Parkhe, 1993). Mutual trust has been identiﬁed as one of the most essential characteristics of high performance alliances as it creates the basis for an enduring and effective relationship between partners (Das & Teng, 1998; Dyer & Singh, 1998; Gulati, 1995; Kale et al., 2000; Zaheer et al., 1998). Trust refers to an actor’s intentions to accept vulnerability based upon positive expectations of the intentions or behaviors of others (Rousseau, Sitkin, Burt, & Camerer, 1998). Such expectations derive either from a mutual hostage situation (deterrence-based trust), which renders opportunistic behavior costly or learning about the reliability and integrity of the partner (knowledge-based trust) (Gulati, 1995; Madhok, 1995). The importance of trust basically derives from the fact that contractual safeguards are not able to account for all possible contingencies that may occur during the lifetime of the relation. Trust as a self-enforcing governance mechanism lowers transaction costs because opportunistic bargaining is constrained (Bradach & Eccles, 1989; Williamson, 1991) and adaptation to contingencies is less costly because friction cost of bargaining, monitoring, and auditing are lower. From a value-creation perspective, researchers argue that with mutual trust partners are able to discover and pursue additional and more risky value-creation initiatives extending the overall beneﬁts from the relationship for the involved parties (Dyer & Singh, 1998; Telser, 1980; Zajac & Olsen, 1993). These performance effects have been largely conﬁrmed in empirical research (Carson, Madhok, Varman, & John, 2003; Young-Ybarra & Wiersema, 1998; Zaheer et al., 1998). According to Anderson and Narus (1990, p. 44) communication ‘‘can be deﬁned broadly as the formal as well as informal sharing of meaningful and timely information between ﬁrms.’’ To realize the potential beneﬁts of the collaboration, effective communication between partners is crucial (Cummings, 1984). Information sharing is strongly related to communication and can be deﬁned as the extent to which critical and often proprietary knowledge is communicated to the partner (Mohr & Spekman, 1994, p. 139). Thus, it encompasses formal and informal procedures for deliberate information disclosure. Open communicating creates transparency that allows greater learning from and about the partner (Doz & Hamel, 1998; Larsson, Bengtsson, Henriksson, & Sparks, 1998) and the development of a shared representation of the task environment (Gulati, Lawrence, & Puranam, 2005).

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Such a development of understanding between parties enhances performance by allowing for superior goal adjustment, better task coordination and execution, an integrative conﬂict management, and interﬁrm learning (Kale et al., 2000; Mohr & Spekman, 1994; Parkhe, 1993; Sivadas & Dwyer, 2000). It is also strongly related to the trust building because interaction quantity and quality inﬂuence the building of informal psychological contracts between individuals that form stronger glue than formal contracts (Ring & Van de Ven, 1994). Furthermore, deliberate information disclosure of partner ﬁrms lowers the assessment, monitoring, and search cost and renders joint activities more efﬁciently. Effective communication of the ﬁrm’s complementary competences and the relationship’s value-creation potential to its partner also enables the discovery of ‘‘unique possibilities they possess for matching their competences and resources’’ (Uzzi, 1999, p. 483). Conﬂict refers to the amount of intense and frequent disagreement and problems between partners. Conﬂicts occur in virtually all interﬁrm relationships on account of the inherent dependencies involved in such interactions (Kale et al., 2000). Some researchers argue that conﬂict may be functional and conducive by allowing parties to clarify issues and reach consensus (Anderson & Narus, 1990). However, there is broad consensus about and empirical support for the negative effects of prolonged and intense conﬂict in a relationship. When parties cannot limit conﬂicts, regardless of their source, the relationship’s viability is threatened because people either directly concerned with the issue or involved as mediators spent increased time and effort on conﬂict resolution. Resources are unproductively spent on non-value-creation activities, so that performance of the relationship tends to decline (e.g., Ross, Anderson, & Weitz, 1997; Zaheer et al., 1998). To summarize, a high quality of the dyadic relation of an alliance leads to enhanced alliance performance because it curbs competitive tendencies and opportunistic behavior that may hamper the realization of the alliance potential and it opens up a wider range of value-generation possibilities for alliance partners. As the previous discussion shows, the proposed elements of relational quality are interrelated in many ways, which warrant their conceptualization as different facets of on concept. In taking a comprehensive perspective, the described characteristics can be viewed as different quality dimensions of alliances, which need to be actively managed by the partners. Although one might argue that mutual development lies in the responsibility of both partners, prior research on the inﬂuence of unilateral action suggests that at least to some extent one partner alone is able to inﬂuence the quality dimensions via selection processes and start reciprocal

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development cycles via unilateral behavior (Cullen et al., 2000; Gulati, Khanna, & Nohria, 1994; Parkhe, 1993; Shamdasani & Sheth, 1995).

ALLIANCE CAPABILITY AND ALLIANCE PERFORMANCE Following Makadok (2001) and Thomke and Kuemmerle (2002), an alliance capability can be seen as a special kind of resource which is nontransferable and has the potential to enhance the performance of other ﬁrm resources dedicated to the ﬁrm’s set of alliances. We refer to these former type of resource (or higher-level resource) as learning mechanisms that can increase a ﬁrm’s ability to, for instance, identify partners, initiate relationships, devise appropriate contracts, implement, manage, and restructure individual alliances as well as an alliance portfolio (Kale et al., 2002; Spekman, Isabella, & MacAvoy, 2000). The decision itself to invest in learning mechanisms by the ﬁrm’s management function is the isolating mechanism, which explains in details what may cause differences in alliance outcomes. Following prior research, we suggest that this capability is valuable at the ﬁrm level, which supports the ﬁrm in raising and maintaining the alliance performance of their entire alliance portfolio. Whereas relational quality investigates factors related to the alliance itself, alliance capability looks at learning mechanisms within an individual ﬁrm that help it to deal with its alliances appropriately.3 Various theories have been used to understand what constitutes an alliance capability. To this end, various theoretical viewpoints have been used to analyze how ﬁrms can develop such capabilities. In particular, the knowledge-based view (Kale et al., 2002; Kale & Singh, 2007) and organizational learning theory (Heimeriks & Duysters, 2007; Sampson, 2005; Simonin, 1997) have been applied to study the relationship between alliance capabilities and performance. Applying these theories, various researchers have investigated the relationship between experience levels, learning in alliance management achieved, investments in specialized resources and mechanisms, and alliance performance (Draulans, De Man, & Volberda, 2003; Dyer et al., 2001; Kale et al., 2002; Kale & Singh, 2007; Reuer, Zollo, & Singh, 2002). Experience can be critical for ﬁrms to better anticipate and respond to contingencies (Anand & Khanna, 2000; Pisano, Bohmer, & Edmondson, 2001; Spekman et al., 2000). From this perspective, earlier trials and tribulations in alliances have been suggested to enhance

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a ﬁrm’s alliance capability. Some evidence has been found for the positive relationship between learning mechanisms in organizations related to alliances and alliance performance (Heimeriks et al., 2007; Kale & Singh, 2007). Other studies found that experience levels – in terms of number of past alliances – and alliance capabilities between ﬁrms differ (Anand & Khanna, 2000). In addition to experience, scholars have suggested that organizational routines (Nelson & Winter, 1982) and absorptive capacity (Cohen & Levinthal, 1990; Lane & Lubatkin, 1998) can foster differentiated learning effects (Larsson et al., 1998) and create unobserved heterogeneity (Das & Teng, 2000). In the end, past learning behavior is proposed to inﬂuence future learning abilities, making learning in alliances a path-dependent phenomenon (Anand & Khanna, 2000). Firms indeed differ in their ability to derive value from alliances (Anand & Khanna, 2000; Khanna et al., 1998; Madhok & Tallman, 1998) and some ﬁrms simply seem to be more effective in applying their knowledge to other alliances (Spekman et al., 2000). This ability to derive value from alliances and learn to manage such deals clearly hinges on the ﬁrm’s prior experience. However, while experience is likely to beneﬁt those that repeatedly form alliances as it equips ﬁrms with lessons and insights, it may become detrimental when reapplied under distinct conditions (Haleblian & Finkelstein, 1999). Given these intriguing ﬁndings, researchers have increasingly paid attention to features of internal organization, such as managerial processes, routines, and values as a basis for ﬁrm-speciﬁc capabilities and competences that are difﬁcult for other ﬁrms to buy or imitate (Eisenhardt & Martin, 2000; Henderson & Cockburn, 1994; Leonhard-Barton, 1992; Teece & Pisano, 1994). Alliance capability research has build on these ﬁndings by focusing on alliance mechanisms that ﬁrms implement and develop internally to enhance alliance performance. The mechanisms may improve the ﬁrm’s realized absorptive capacity by enabling it to absorb lessons learned in its alliances (Cohen & Levinthal, 1990). By deploying such learning mechanisms as an alliance database or intranet ﬁrms ensure that new knowledge available from partners can be more readily be recognized, captured, and reapplied. Despite the empirical investigations, the transition from experience to capability has remained obscure (Kale et al., 2002). Furthermore, an in-depth investigation of the various mechanisms used in practice and their impact on alliance performance is missing. In practice, ﬁrms have accumulated experience and started to invest in mechanisms that support dissemination of experience with alliances throughout the company in order

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to overcome performance disturbances. Based on the kind and number of alliances formed, different levels of alliance experience or activity (Anand & Khanna, 2000) can be used to categorize alliance mechanisms, which can enhance alliance performance. Based on Draulans, De Man, and Volberda (1999), AllianceAnalyst (1996) and Harbison and Pekar (1998b), we identify three levels of alliance experience. Each level has a prototypical character at which different alliance mechanisms are suggested to increase alliance performance. As illustrated in Table 1, certain mechanisms are likely to be useful at different levels of alliance experience. At the ﬁrst level, ﬁrms are in a situation that one of several alliances demands corporate attention. The ﬁrm has limited experience in preparing for interﬁrm activities as well as the actual implementation of an alliance. Therefore, in-house knowledge consists mainly of general, nonspeciﬁc contractual, organizational and cultural know-how related to partner selection. At this level, ﬁrms tend to favor learning-by-doing (Harbison & Pekar, 1998b), rather than opt for a structural approach to accumulate alliance-related knowledge. As a result, the ﬁrms will often encounter restricted success with their strategic cooperative movements. In order to prevent ﬁrms from unsatisfactory results, ﬁrms can use a number of mechanisms at this level. First of all, simple tools such as alliance evaluation and a partner selection approach are easy ways to increase awareness and decrease ad-hoc decision making in alliances. Second, a culture program or external alliance trainings may help ﬁrms increase Table 1.

Levels of Alliance Experience.

Level 1

Level 2

Level 3

Number of alliances

Small

Reasonable

Large

Importance

Operational

High for certain units or divisions

Strategic for the entire company

Geographical reach

Regional/national

Starting with internationalization

International

Management tools (cumulative examples per level)

Legal knowledge Checklists for partner selection & monitoring Evaluation of individual alliances

Best practices Alliance specialist Cultural trainings

Partner program Alliance department Alliance knowledge dispersed via trainings Alliance database

Source: Adapted from Draulans et al. (1999). (Used with permission of the Holland Management Review.)

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alliance know-how (Spekman et al., 2000). The mechanisms should be aimed at gaining a proper understanding of the most relevant principles in alliances for the particular ﬁrm. At the second level, a ﬁrm’s alliance portfolio starts to comprise more and more interﬁrm activities. Firms start to create standard procedures to manage alliances and often experience greater success in the established alliances. Standardization of alliance procedures facilitates interﬁrm learning. Though mainly at top management level, it is at this level that ﬁrms actually start to build speciﬁc alliance knowledge. This partly generalized knowledge, however, resides in the minds of a small number of specialists who are active in the ﬁrm. A primordial and detrimental drawback of this position is that it may prohibit the dissemination of alliance knowledge to the employees in need. The importance of alliances for the ﬁrm has increased at this level; therefore more resources should be allocated to build capabilities. Various mechanisms can help do so. First, ﬁrms can gather best practices based on their own experiences and those of other ﬁrms and evaluate their alliances. This will allow ﬁrms to learn in a more efﬁcient manner. Second, to stimulate sharing of these lessons, alliance trainings and use of external specialists may help extend and disseminate speciﬁc knowledge. Third, ﬁrms can use alliance metrics and reward and bonus systems to motivate business unit managers to increase their alliance success. Fourth, ﬁrms can assign an alliance specialist (Draulans et al., 1999), manager, or gatekeeper at this level. These can be used to monitor the environment and translate information into applicable knowledge (Cohen & Levinthal, 1990; Doz & Hamel, 1998; Leonard-Barton, 1995). The prohibition of unnecessary knowledge leaks (Lei, Slocum, & Pitts, 1997) and protection of intellectual property (e.g., Grindley & Teece, 1997) can prove a useful means to decrease conﬂict situations. It is therefore critical for ﬁrms to prevent use of a weak liaison involved in its alliances (Doz & Hamel, 1998; Kanter, 1983). At this level, these mechanisms may help extend the body of knowledge in order to achieve a higher level of alliance capability (Simonin, 1997). At the third level, alliances have become a top management priority. This phase requires alliances to be thoroughly embedded in business strategy, reﬂecting the highest level of alliance capability attainable. The essential characteristic of this stage is that the ﬁrm is consciously building and dispersing its alliance experience and knowledge throughout the ﬁrm in a structural way. No longer does alliance knowledge reside in a few professionals, but dedicated investments are made to disperse knowledge throughout the ﬁrm. To this end, top management is dedicated to build and maintain a distinct set of mechanisms to optimize alliance performance.

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Thus, alliances are not merely of operational or business unit concern, but instead are given attention at the strategic or corporate level (Draulans et al., 1999). Several mechanisms can support ﬁrms to build capabilities at the third level. First, central coordination becomes important as a means to facilitate knowledge sharing on a structural basis (Draulans et al., 1999; Dyer et al., 2001; Kale et al., 2002; Kale & Singh, 2007). For instance, an alliance department or function can act as a central coordination mechanism to increase coordinative capacity (Harbison & Pekar, 1998a; Kale & Singh, 2007). In the same vein, this mechanism may positively inﬂuence the absorptive capacity of the ﬁrm and help overcome the factors that impede learning, such as fragmentation of knowledge, conﬂicts, tacitness, memory, or too small sample sizes (see, e.g., March, Sproull, & Tamuz, 1991; Zollo & Winter, 2002). Using an alliance department together with a gatekeeper, alliance manager or vice-president combines external and internal coordinative capabilities at the same time. In alliances, internal and external coordination should both be appreciated (Takeishi, 2001; Teece & Pisano, 1994). Second, an alliance database can help accumulate and assemble experience in such a way that it is easily transferable (Khanna et al., 1998). In general, these mechanisms can increase a ﬁrm’s ability to learn (Spekman et al., 2000).

RELATIONAL QUALITY, ALLIANCE CAPABILITY, AND ALLIANCE PERFORMANCE Having discussed both antecedents of alliance performance separately, we subsequently argue how the effect of alliance capabilities on alliance performance is mediated by the degree to which each of the four characteristics of relational quality is present in the alliance – commitment, trust, information sharing, and communication and the level of conﬂict. The Role of Commitment as a Mediator Although theoretically related and practically intervened, commitment and trust are distinct concepts (Cullen et al., 2000). The willingness to exert effort, thus, ensuring that agreed upon decisions are implemented and veriﬁed is an essential characteristic of a high degree of commitment. Furthermore, from a social exchange perspective, both parties enhance

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commitment to the relationship in a positive reinforcement cycle that increases the level of mutual commitment over time (Anderson & Weitz, 1992). The positive effect of commitment on value creation in interﬁrm relationships has been shown in several studies (e.g., Holm et al., 1999; Mohr & Spekman, 1994; Parkhe, 1993). Consequently, getting people, groups, or organizations to focus and commit to a common goal is a pathway to competitive advantage (Greenhalgh, 2001). Commitment needs to be achieved at two levels: internal commitment of manager and employees to the alliance and, as perceived by the partner, direct commitment to the alliance. Both require the dedication of resources and a general appreciation of collaborative action. The creation of distinct mechanisms is an internal investment, which reﬂects corporate commitment. Likewise, e.g., the assignment of a vice-president for alliances or apt incentive systems signals the appreciation and importance given to alliances within the company, thus, inﬂuencing the motivation to engage in the alliance (Kale et al., 2002; Lambe, Spekman, & Hunt, 2002). Regarding the commitment revealed within the alliance, these alliance mechanisms have different impacts. First, systematic alliance management approaches per se secures that alliance management is given the needed resources and time, which acts also as a signal to the partner. Second, as Kale et al. (2002) argue, the creation of an alliance department is helpful in organizing resources within the company, which are required to foster alliance performance. Given that the alliance department is equipped with appropriate decisionmaking power and intraﬁrm connections, they can directly contribute and assist in mobilizing resources from other company units in the formation phase of the alliance life cycle as well as during the evolution of the alliance. In addition, systematic alliance management mechanisms like alliance metrics and evaluation processes are useful in determining which contributions are actually deemed necessary. Proposition 1. Alliance capability is positively related to the level of commitment in strategic alliances.

The Role of Trust as a Mediator Mutual trust includes a set of expectations between the partners regarding each other’s behavior and the fulﬁlment of the perceived obligations in the light of such anticipation (Madhok, 1995; Thorelli, 1986). Guided by the past behavior of exchange partners, mutual trust is a product of investments

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in numerous interactions between partners (Cullen et al., 2000; Ring & Van de Ven, 1994). Despite the initial trust needed to start preliminary negotiations, the development of benevolent and credibility trust builds on the accumulation of interactions, which are judged to be efﬁcient and appropriate by the partners (Ring & Van de Ven, 1994). These mechanisms to build trust imply that ex ante expectations regarding actions and behavior of the partner are clearly deﬁned and communicated between the parties. In an ongoing process of assessment and evaluation of the partner’s actions, sufﬁcient information to achieve an objective judgment is needed. Thus, alliance mechanisms and resources, which help to provide the partner with relevant information to develop expectation, judge the following action and evaluate the result, are crucial for developing trust in the partner. For instance, joint business planning, joint evaluation sessions or a shared intranet can provide possibilities for congruent sense making, exchange positions, and detect potential conﬂicts. Process as well as outcome discrepancies can be detected early and appropriate measures may prevent vicious cycles, which defect the alliance (Kumar & Nti, 1998). Furthermore, the investment in a dedicated alliance department is likely to help the company to develop and disseminate behavioral rules for interaction processes. These ‘‘codes of conduct for alliances’’ are developed over time and summarize the essence of what is seen to be appropriate behavior in alliances. Despite the formal processes, they are disseminated and transferred in implicit socialization processes, ofﬁcial guidelines, or explicit alliance trainings. They give managers advice how to avoid pitfalls in behavior, which might undermine trust building in relationships. Proposition 2. Alliance capability is positively related to the level of trust in strategic alliances.

The Role of Information Sharing and Communication as Mediator Communication and information sharing are important for the assessment of competences, development of a shared understanding, efﬁcient coordination and execution of tasks, conﬂict management, interﬁrm learning, ﬂexibility in alliances, and the ability of the alliance counterpart to evaluate and judge a partner’s behavior in the alliance (Jap, 2001; Kumar & Nti, 1998; Ring & Van de Ven, 1994). Suboptimal information channels, insufﬁcient resources to fuel these channels, missing opportunity, and reluctance of people to share

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information, hinder an optimal ﬂow of information and adequate communication. Therefore, the quality and quantity of communication and information sharing is augmented by measures to overcome these limitations. Different mechanisms address the problem of deﬁcient communication and information sharing. First, e.g., a partner program, alliance gatekeepers and alliance managers, as well as alliance departments are direct measures to offer information channels. Furthermore, alliance specialists can aid in designing appropriate information and communication structures within an alliance. Second, these mechanisms also tackle the problem of insufﬁcient resources in terms of management capacity. Third, joint business planning and joint evaluation, organization of meeting events within a partner program, or processes for knowledge exchange between the partners secure that there are sufﬁcient opportunities and management time reserved to engage in frequent interaction. Fourth, reluctance of people to share information cannot be addressed directly by these measures, because this is often deeply rooted within the people and informally expressed within these formal measures. However, reluctant information sharing is often caused by uncertainty, which information and knowledge is to be shared, and which not. Therefore, to remain on the safe side, people give less information than might be needed and engage less in communication. Drawing upon their alliance knowledge, alliance departments may provide managers and employees with advice how to handle this issue. This allows for better sharing of information and knowledge while preventing the loss of critical, proprietary knowledge, which need to be kept inside the ﬁrm. Proposition 3. Alliance capability is positively related to the level of information sharing and communication in strategic alliances.

The Role of Conﬂict as a Mediator Conﬂict constantly looms to destabilize interﬁrm interactions. Conﬂict may be founded on a great variety of sources (Gulati et al., 2005; Mohr & Spekman, 1994), and generally causes relationships to malfunction and destabilize. In some instances, conﬂict may help to, e.g., crystallize each partner’s contribution and input to the alliance, after which operations and management can resume. However, in many instances conﬂict is likely to indeed destabilize the alliance and threatens optimization of exchange processes between partners. Therefore, it is important for the partners involved throughout the entire alliance process to guard against looming conﬂict.

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While conﬂict occurs between the interacting alliance team members of the partners involved, some mechanisms deployed at the ﬁrm level may help attenuate the likelihood of enduring conﬂict between partners. For instance, having a mediator available in case of looming conﬂict may also indicate that a ﬁrm is committed and takes the relationship seriously. Such a mediator can help reestablish important but malfunctioning relationships between alliance team members. Similarly, joint evaluations between partners may serve to clarify where and how the relationship may be improved and how such suboptimal behavior may be avoided. By explicating what went wrong and could be improved, such evaluations function as a mechanism to help partners share expectations and frustrations when management of the alliance is not optimal. Proposition 4. Alliance capability is negatively related to the level of conﬂict in strategic alliances.

DISCUSSION AND CONCLUSION This paper has examined the relationships between relational capability, alliance capability, and alliance performance to propose a framework that integrates these concepts. In doing so, we built on previously disconnected but complementary theoretical approaches. In particular, we suggest that relational quality is a mediator between alliance capability and alliance performance. Describing the underlying causal mechanisms to this relationship not only brings together previously separated theoretical lenses (Shenkar & Reuer, 2006), but also adds to our understanding how factors at different levels of analysis hinge together to inﬂuence alliance performance. This, we hope, causes research into antecedents of alliance performance to become more integrative in the future rather to remain scattered. This study discussed in detail how ﬁrm-level alliance capability and its underlying mechanisms (e.g., alliance function, partner selection protocols) are linked to create improved alliance outcomes. Four distinct aspects of relational quality (commitment, trust, information sharing and communication, and conﬂict) are enhanced via such ﬁrm-level mechanisms. In other words, the higher a ﬁrm’s level of alliance capability, the more likely it is that this ﬁrm manages to realize high levels of relational quality in its alliances. More particularly, the four aspects mediate between alliance capability and alliance performance in the following ways. First, commitment to the alliance can be fostered by providing actual top-level support in

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the form of a vice-president of alliances or alliance department. Such functions are visible demonstrations of actual commitment to not only alliances in general, but also the alliance at hand. Second, trust between partners is nurtured between partners when a ﬁrm is perceived as committed to manage the relation in a professional fashion. Ensuring that professionals involved are well trained and evaluating progress can be an important way to create an initial basis for trust. Third, effective information sharing and communication is facilitated when gatekeepers and shared information platforms such as intranet or databases are shared to ensure easy ﬂow of information between partners. Fourth, the presence of a mediator may be a good indicator of the degree to which the ﬁrm is seriously committed to making the relationship work and ultimately dedicated to avoid conﬂict. Hence, all six aspects of relational quality beneﬁt from various ﬁrm-level mechanisms, which underlie a ﬁrm’s alliance capability. We have argued that these mechanisms not only improve the ﬁrm’s ability to disperse and replicate knowledge inside the ﬁrm as discussed in recent work by Heimeriks et al. (2007) and Kale and Singh (2007), but describe how these ﬁrm-level mechanisms affect relational quality.

Future Research Based on our investigation there are several fruitful avenues for future research. First, empirical research should investigate whether relational quality is indeed determined by the set of characteristics suggested in this paper. Identiﬁcation of the quality dimensions, which have to be actively managed by alliance partners, will help managers in investing in the most suitable resources and selecting the appropriate mechanisms for management. Furthermore, research on the interaction effects between these different qualities can reveal whether a high level of one characteristic can substitute for a low level of another, e.g., prior research suggest that formalized structures can be minimized in relationships governed by high levels of mutual trust. Second, by investigating the various alliance mechanisms and their inﬂuence on alliance performance in different industry contexts, future research can determine whether alliance capability can indeed be viewed as a stage model and which contingencies determine which capability level is appropriate for different companies. Furthermore, from a learning perspective, it would be interesting to explore whether a higher level of alliance

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capability of one partner inﬂuences the capability development of the other partner and if partners are adopting favorable practices from one another. Third, the importance of different mechanisms for alliance management in different alliance tasks and phases of the life cycle can be explored. Business ﬁrms might use the resulting set of appropriate mechanisms to aid managers to develop and measure alliance capability, to ascertain an appropriate mixture of resource dedication and mechanisms, and to emphasize the application of speciﬁc mechanisms in different circumstances. In addition, contingency theory suggests that different types of alliances need different mechanisms for managing them. As research on innovation indicates, uncertainty is highest in early innovation stages and in radical innovation projects. Thus, one might conclude that mechanism allowing for ﬂexibility, aimed at achieving high levels of mutual trust and commitment and transparency between partners need to be highest.

NOTES 1. Here, it is assumed that the learning mechanism such as alliance trainings, consultants, intercultural trainings, alliance managers, and specialists, etc. (for an overview see Heimeriks & Duysters, 2007; Leonard-Barton, 1995) promote and imply the constituent elements of alliance capabilities, e.g., in terms that these means inform managers how to make the best selection of an alliance partner, to devise an suitable contract, or to communicate, coordinate, and build trusting relationships in alliances. 2. To date, to the best of our knowledge performance measures that capture positive synergies or negative spillover between alliances in a portfolio are missing. Closest to this are network-analytical approaches that link ﬁrm performance with particular conﬁgurations of alliance networks or the ﬁrm’s position in the network (Goerzen & Beamish, 2005; Koka & Prescott, 2002; Powell, Koput, & Smith-Doerr, 1996; Stuart, 2000; Uzzi, 1996; Zaheer & Bell, 2005). 3. We acknowledge that it is likely that the decision to invest in learning mechanisms may be endogenous and related to prior performance. However, prior research has demonstrated that a deliberate learning effect is also apparent when controlling for this (see, e.g., Heimeriks et al., 2007).

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HOW TO BUILD ALLIANCE CAPABILITY: A LIFE CYCLE APPROACH Kim Sluyts, Rudy Martens and Paul Matthyssens ABSTRACT This paper has a threefold purpose. First, we offer a literature review on alliance capability based on strategic and competence-based management literature. Second, we extend existing literature on alliance capability by breaking this concept down into ﬁve subcapabilities, each of which is linked to a stage of the alliance life cycle. Finally, we suggest how ﬁrms can support these capabilities through structural, technological, and people-related tools and techniques. We argue that current literature has focused mainly on organization-wide characteristics, the general alliance function, and alliance experience to explain the level of alliance capability. Although we acknowledge the importance of these elements, we stress that more attention needs to be given to the various stagespeciﬁc components, actions, and supportive mechanisms that can result in an improved alliance capability.

Enhancing Competences for Competitive Advantage Advances in Applied Business Strategy, Volume 12, 173–200 Copyright r 2010 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1108/S0749-6826(2010)0000012010

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1. INTRODUCTION Since the 1970s, the number of interorganizational alliances (e.g., joint ventures, R&D collaborations, comarketing agreements) has increased exponentially. More and more, ﬁrms tend to call on external partners to meet the increased uncertainty in the (inter)national business world, resulting in a growing pressure on margins, higher quality standards, advanced customer demands, and fast changes in technological developments. The use of collaboration has become particularly acute in capital- and knowledgeintensive business sectors. Product and technological complexity, and the shortening of the innovation cycles have made companies increasingly dependent on external parties in their product development, leading to the socalled open innovation model (Chesbrough, 2006). These pressures have also led to a more relational and network approach to business marketing (Ford, Gadde, Hakansson, & Snehota, 2006). Alliances help ﬁrms to improve their current operations (e.g., through economies of scale, by sharing risks, etc.), creating a more favorable environment (e.g., by setting technological standards) and facilitating entry or exit (Barney & Hesterly, 2006). Despite the fact that companies increasingly rely on interﬁrm collaborations, studies have shown that between 30 and 70% of alliances fail; they do not meet the goals of their parent companies, nor do they reach the strategic beneﬁts they were supposed to (Kale & Singh, 2009). As Stuart (2000) notices, it is remarkable that current literature has focused so much on structural characteristics of the alliance to explain alliance success and that some partner-speciﬁc characteristics have been relatively neglected. Alliance success has often been assigned to the type of alliance, the strategic or cultural ﬁt between the partners, the status of the partners and to the level of trust, commitment, and communication (e.g., Wu & Cavusgil, 2006; Krishnan, Martin, & Noorderhaven, 2006; Kale & Singh, 2009). We argue that alliance success can be inﬂuenced to a great extent by speciﬁc ﬁrm characteristics and more speciﬁcally by the degree to which partners are adept at managing their alliance processes, referred to as their level of alliance capability. Alliance capability can be described as the degree to which a company is capable to create successful alliances, based on internal learning processes on alliance management and the capability to leverage alliance knowledge within the company (Draulans, deMan, & Volberda, 2003). According to Mo¨ller and Svahn (2003) there are four levels of network management: network visioning, net management, portfolio management, and relationship management. The ﬁrst three levels emphasize the importance of value systems and the identiﬁcation of key actors, the way

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a company should mobilize and coordinate different value nets, and the choice it has to make as to which net(s) it wants to belong now and in the future. The fourth level considers how single strategic relationships can be created, managed, and controlled efﬁciently. Alliance capability can be situated at this last level. Research on alliance capability is relatively new and deals with the importance of internal processes, tools, speciﬁc functions, and/or structures that aim to capture and diffuse alliance knowledge that is gathered through alliance experience. This way ﬁrms can leverage knowledge on the alliance management process which will improve not only the ﬁrm’s ability to manage a single relationship but also its management ability of the portfolio of all relationships (Ritter & Gemunden, 2003).The concept is rooted in theoretical perspectives and concepts that put forward knowledge and competence creation, accumulation, and integration as a central issue, such as the competence-based view of the ﬁrm (Sanchez, Heene, & Thomas, 1996), the learning organization (Levitt & March, 1988), absorptive capacity (e.g., Zahra & George, 2002; Lane, Koka, & Pathak, 2006), and the knowledge-based theory of the ﬁrm (Grant, 1996). The common idea behind these theories is that competitive advantage is closely linked to the organizational knowledge or competences a ﬁrm possesses.

1.1. Research Focus Authors within the ﬁeld of alliance capability have investigated how ﬁrms can improve alliance outcome through sound alliance management and by internalizing the ﬁrms’ acquired experience. Up to now the focus has been put mainly on the role of alliance experience (e.g., Zollo, Reuer, & Singh, 2002; Hoang & Rothaermel, 2005) and on the importance of the alliance function (e.g., Dyer, Kale, & Singh, 2001; Kale, Dyer, & Singh, 2002; Hoffmann, 2005). Alliance literature has elaborated on the content of alliance capability, while the process of how to build alliance capability has been somewhat neglected. This study aims to deepen the concept of alliance capability in several ways. First, we offer a literature review of the concept of alliance capability by integrating several insights about alliance capability from various research streams. Second, we identify gaps in the literature and put forward conceptual extensions and suggest possibilities for future research. Spekman, Isabella, and MacAvoy (1998) points out that there is little research on the various capabilities, which are important throughout the different stages of the alliance life cycle (ALC). Instead of describing the concept of alliance capability as one metaskill at corporate level, we aim to

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break it down into different ‘‘micro competences’’ at different stages in the ALC. Although the concept of the ALC is well known (e.g., Kanter, 1994; Das & Teng, 2002), the authors know of little research on the speciﬁc demands, skills, and competences that are required during the different stages. By providing a model with a clear overview on stage-speciﬁc tasks and goals, we aim to open the black box on the capability-building process and provide managers with a tool that can help them with setting up successful alliances. We believe these insights are highly relevant in the B2Bmarket context, where alliances – and therefore also alliance management – have gained considerable importance over the past 20 years. In the next paragraph, we will elaborate on the concept of alliance capability. The relation between alliance capability and alliance experience will be explained in more detail. Next, we propose a ﬁve-stage model of the ALC process. Finally, we will specify stage-speciﬁc competences and provide an overview of relevant tools that ﬁrms can implement in order to improve their alliance management process. By specifying the stage-speciﬁc competences and tools, we aim to advance the current literature on alliance capability by giving more insights in the building process of alliance capability.

2. THE CONCEPT OF ALLIANCE CAPABILITY AND ALLIANCE EXPERIENCE In alignment with the competence-based view of the ﬁrm we aim to reveal the capabilities, which are needed to successfully manage the alliance process. According to the competence-based view of the ﬁrm, as developed by Sanchez (1996), a competence can be described as the ‘‘ability to sustain the coordinated deployment of assets in a way that helps a ﬁrm to achieve its goals’’ (Sanchez et al., 1996, p. 8). Both tangible and intangible assets can be distinguished. Capabilities form a special category of intangible assets and are deﬁned as ‘‘repeatable patterns of action in the use of assets to create, produce and/or offer a product to a marketyCapabilities arise from the coordinated activities of groups of people who pool their individual skills in using assets’’ (Sanchez, 2004). Based on these authors and other literature on competences and (dynamic) capabilities (Nelson & Winter, 1982; Teece, Pisano, & Shuen, 1997; Chen, Lee, & Lay, 2009), we argue that the concept alliance capability is the most accurate, as it speciﬁcally refers to the ﬁrms’ deliberate and emergent learning processes with regard to alliance management, which are translated in ﬁrm-speciﬁc routines. Furthermore, the use of

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the word ‘‘capability’’ implies that the concept is understood as a dynamic process and a higher order resource (Amit & Schoemaker, 1993; Teece et al., 1997). This description is similar to discussions on competencies as series of activities and a process (Winter, 2003). With respect to alliance learning and the transfer of knowledge, authors within network literature have focused primarily on circumstances and factors that facilitate the improvement of the interorganizational transfer of knowledge and learning between ﬁrms. The concept of ‘‘learning races’’ (Gulati, Nohria, & Zaheer, 2000), which refers to the ﬁrms’ efforts to outlearn their partners, is a typical example of this focus. Although there has been research on the impact of alliance experience on alliance outcome (e.g., Zollo et al., 2002; Hoang & Rothaermel, 2005; Sampson, 2005), with mixed results, few authors have investigated the intraorganizational alliance knowledge processes, which aim at gathering and diffusing knowledge on the alliance management process within the ﬁrm. The terminology on these processes has been very diverse, the most frequently used terms are alliance competence and alliance capability and often the two terms are used intertwined. Table 1 summarizes the studies on this topic and shows the different concepts

Table 1. Author

Year

Ritter and Gemunden Spekman et al.

2003 2000

Alliance Capability: Concept Review. Concept

Network competence Alliance competence

Lambe, Spekman, 2002 and Hunt Kale et al. 2002

Alliance competence Alliance capability

Rothaermel and Deeds

2006

Heimeriks and Duysters

2007

Alliance management capability Alliance capability

Kale and Singh

2007

Alliance capability

Deﬁnition A company-speciﬁc ability to handle, use, and exploit interorganizational relationships Alliance competence is partly a function of individual skills and capabilities and ﬁrm-level attributes that enhance, encourage, and support alliance-like thinking and behavior throughout the ﬁrm The organizational ability for ﬁnding, developing, and managing alliances The ﬁrm’s ability to effectively capture, share, and disseminate the alliance management know-how; associated with prior experience A ﬁrm’s ability to effectively manage multiple alliances

The degree to which ﬁrms are able to use mechanisms to integrate alliance related knowledge, which enable them to create routines for managing alliances The ﬁrm’s ability to learn and accumulate alliance management know-how

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and deﬁnitions that have been used. In this paper we will adopt the deﬁnition of Kale et al. (2002, p. 750), who deﬁne alliance capability as the ﬁrm’s ability to effectively capture, share and disseminate the alliance management knowhow, associated with prior experience. Central to this deﬁnition is the idea that companies need to accumulate and spread alliance knowledge, which is gathered through alliance experience. In general, the literature on alliance capability can be divided into two groups: studies on alliance experience (seen as an antecedent of alliance capability) (Anand & Khanna, 2000; Rothaermel & Deeds, 2006; Draulans et al., 2003) and studies on how ﬁrms can integrate and spread alliance knowhow (usually these studies have focused on the importance of the alliance function and on the alliance tools and mechanisms a ﬁrm can adopt) (e.g., Spekman, Isabella, & MacAvoy, 1996, 1998; Dyer et al. 2001, 2002; Heimeriks & Duysters, 2007). According to Kale et al. (2002), organizational capabilities result out of recombining and/or integrating knowledge within the ﬁrm. This knowledge is created by learning processes that take into account past actions, the effectiveness of those actions, and future actions. When applied to the context of alliances, one can assume that alliance capability can be improved by installing mechanisms and routines that capture and spread alliance knowhow, which can be created through alliance experience. Fig. 1 summarizes this process and shows the relation between the different concepts. The focus of this paper will lie on the arrows and building blocks that are presented in bold, the dashed lines, and blocks are added for the completion of the model. Several authors have investigated the impact of alliance experience on alliance performance (e.g., Anand & Khanna, 2000; Sampson, 2005; Rothaermel & Deeds, 2006). Most studies have focused on the direct impact of alliance experience on alliance outcome, without taking into account the capability-building ability of the ﬁrm. A notable exception forms the study of Heimeriks and Duysters (2007) who have investigated

knowledge transfer mechanisms

alliance capability

alliance experience

Fig. 1.

The Alliance Capability Process.

alliance performance

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both the direct effect of alliance experience on alliance outcome and its indirect effect through the contribution to alliance capability. They empirically tested these relations and found evidence that both experience and alliance capabilities contribute to alliance success. They found that the simultaneous development of the ﬁrm’s alliance experience and learning mechanisms (in Fig. 1 referred to as ‘‘knowledge transfer mechanisms’’) – both of which are needed to build alliance capability – will improve the alliance performance of the ﬁrm. In this paper, we will speciﬁcally emphasize the process through which companies can build their alliance capability, by focusing on stage-speciﬁc and metatasks and related learning mechanisms, which can improve the alliance capability of the ﬁrm. Alliance experience has become a central theme within the alliance capability literature. Scholars have used alliance experience both as an antecedent and proxy for alliance capability. In line with previous research we describe alliance experience as the know-how on alliances, which is generated through the ﬁrm’s engagement in prior alliances (Gulati, 1995; Kale et al., 2002; Heimeriks & Duysters, 2007). Often alliance experience has been measured as the number of alliances the ﬁrm has been involved in during a period of time (e.g., Draulans et al., 2003; Sampson, 2005; Heimeriks & Duysters 2007). According to Simonin (1995), alliance experience will contribute to the rise of alliance capability, because experience is the source of knowledge on alliance processes. This idea adheres closely to the concept of ‘‘learning by doing’’ and to the ‘‘organizational learning theory’’ (Levitt & March, 1988), which – applied to alliance management – predicts companies can learn to improve the management of alliances through repetition. Several studies have analyzed the direct effect of alliance experience on alliance outcome and have found mixed results. Some studies have emphasized a strictly positive relationship such as Shan, Walker, and Kogut (1994), who showed that high-tech start-ups with prior alliance experience managed to increase their innovativeness. Experience seems to play a signiﬁcant role in joint venturing, especially in R&D joint ventures, where ﬁrms with more experience are found to create more value than ﬁrms without previous alliance experience (Anand & Khanna, 2000). While the previous studies found a positive linear relationship between prior alliance experience and alliance outcome, Rothaermel and Deeds (2006) and Draulans et al. (2003) ﬁnd that there are diminishing returns to alliance experience: increases in alliance experience do not continuously improve alliance performance. The research of Rothaermel and Deeds (2006) links innovativeness of biotech ﬁrms to alliance experience and shows that there exists an inverted U-shape relationship between the number of

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alliances the biotech ﬁrm entered and its performance; after a certain threshold there is a negative return on alliance experience. Several reasons can be found. Firstly, there is a limitation with respect to dedicated ﬁnancial and human resources; the more alliances a ﬁrm enters, the more these resources get stretched to the maximum. Secondly, ﬁrms may become stuck in a competency trap (Quynh & Martens, 2008). They have developed routines, processes, or structures to deal with certain speciﬁc alliances and fail to adapt to changes in the environment (inertia). Thirdly, it is possible that ﬁrms enter the most promising alliances ﬁrst, this way limiting the alliance opportunities with other partners. The disappointing outcome of the subsequent alliances may be due to the fact that these alliances only represent ‘‘second best’’ options (Hoang & Rothaermel, 2005). Finally, companies may become less eager to learn from new experiences. The incentive to learn from new alliances may diminish over time, leaving them less ‘‘open’’ to new learning possibilities. The studies mentioned above have investigated the relationship between experience and alliance outcome, but do not analyze the relationship between experience and alliance capability or how experience actually affects alliance performance. The link between experience, alliance capability, and alliance performance has not yet been clearly deﬁned. Scholars have emphasized that experience in itself will not cause performance improvement, such as suggested in studies on the ‘‘experience curve.’’ The underlying explanation is that performance improves due to learning effects, caused by experience. Organizational learning occurs through the ﬁrm’s inferences of past experiences and the translation of these inferences for future actions (Levitt & March, 1988). These inferences are ﬁrm speciﬁc and can explain the differences in alliance outcome. Moreover, we want to emphasize that alliance capability and alliance outcome are two different concepts. In several studies, these two concepts are either used as synonyms or alliance outcome is used as a measurement instrument of alliance capability (e.g., Rothaermel & Deeds, 2006). We would like to stress that alliance outcome can be positively inﬂuenced by the presence of alliance capability (e.g., Kale & Singh, 2007) but that there is no clear linear relationship. Alliance experience is to be viewed as an antecedent – and not a proxy – of alliance capability. By the use of learning mechanisms that capture and disperse the knowledge that stems from alliance experience, companies can get better at successfully managing their alliance portfolio. Therefore, experience will only result in improved alliance outcome if the knowledge that ﬂows from experience is effectively captured and dispersed. We argue that alliance experience is a necessary but not sufﬁcient condition for alliance

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success. We argue that the constant monitoring and enhancing of the alliance management processes is crucial for an improved alliance outcome.

3. ALLIANCE CAPABILITY THROUGHOUT THE ALLIANCE LIFE CYCLE Up to now, alliance capability has often been deﬁned at corporate level, where it has been described as a ﬁrm’s ability to successfully manage alliances, based on the collection and dispersion of alliance know-how. In this section we will analyze in depth the process of alliance capability building. Alliance capability can be viewed as a metaskill, which can be divided in subcapabilities according to the different stages of the ALC. For this purpose, we need an overview of the different goals, which need to be achieved at each stage and the tasks, which need to be accomplished in each stage. The ALC captures the stages through which alliances emerge, grow, and dissolve. Although the life cycle approach is nothing new in marketing and management literature (e.g., the Product Life Cycle), the concept of the ALC has not yet been clearly described.

3.1. The Alliance Life Cycle In Table 2, we offer a literature review on the ALC. Over the years different models of the ALC have been conceived, distinguishing different stages and describing these stages by various levels of abstraction. Each stage is presented as a discrete event in a linear series of events, but in business practice stages can blend into each other. As such, it becomes hard to deﬁne strict boundaries between stages. Based on the literature review we distinguish ﬁve stages, in each of which a couple of key activities need to be fulﬁlled. Strategy stage: Firms need to develop an alliance business case in which they will analyze the speciﬁc need of the ﬁrm and the costs and beneﬁts of fulﬁlling this need via an alliance (Dyer et al. 2001). Moreover, the company needs to analyze the ﬁt of the alliance with the overall corporate strategy and vision. Search stage: This stage comprises the ﬁrm’s efforts to ﬁnd and select a partner. Based on the ﬁrm’s needs and organizational proﬁle, ﬁrms need to ﬁnd a suitable partner that can fulﬁll their needs. Firms will scan the environment for potential partners, create a short list and select one (or

4

5

Ring and Van De Ven 1994

1994

1995

1996

1997

1997

1998

2001

2002

2008

Kanter

Newman

Spekman et al.

Das and Teng

Brouthers, Brouthers, and Harris

Ford et al.

Dyer et al.

Das and Teng

Jiang, Li, and Gao

4

3

5

4

5

7

7

3

7

1993

Chan and Harget

Negotiation and formation

Creation Stage

Planning and negotiation

Engagement

Locating partners

Partner selection

Exploratory

Negotiation

Negotiation and formation

Engagement and valuation

Partner selection

Courtship

Negotiation and commitment

Search and dialogue

Search Stage

Overview of ALC Models.

Partner selection

Formation Structuring

Alliance business Partner assessment Negotiation and case and selection governance

Prerelationship

Selecting mode

Alliance strategy

Anticipation

Strategy

Year ALC Strategy Stage Stages

Author

Table 2.

Implementation

Operation

Management

Development and stable

Management

Operation

Coordination and investment

Implementation and control

Housekeeping and learning to collaborate

Execution

Operation

Operation Stage

Performance evaluation

Outcome

Assessment and termination

Evaluation

Evaluation and modiﬁcation

Stabilization and decision

Evaluation

Termination

Evaluation Stage

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more), based on an in-depth analysis of the proﬁle of the partner. Both cooperative compatibility (e.g., shared vision, the will to collaborate and to commit, and the presence of alliance spirit (Ritter & Gemunden, 2003; Spekman, Isabella, & MacAvoy, 2000) and business compatibility (e.g., reconcilable goals, complementary resources, and strategic, operational, and cultural ﬁt) need to be explored (Bierly & Gallagher, 2007; Kale & Singh, 2009). Creation stage: Firms will start the negotiations, which will determine the exact conditions of the alliance (Urriolagoitia & Planellas, 2007). During this stage, companies will approach potential partners, argue, bargain, and negotiate on terms and procedures. Both parties have to decide on the value of the alliance and the contributions (e.g., human, ﬁnancial, material, and/or technological investments) they are prepared to make. Furthermore, the ﬁnancial (determination of royalties and milestones, proﬁt sharing, etc.) and legal framework (choice of governance structure, arbitration clauses, exit clauses, etc.) need to be elaborated (Das & Teng, 2002). The agreement on the deal will impose a number of duties and rights on the organizations (Mouzas & Naude´, 2007). Operational stage: Firms need to manage the day-to-day operations of the collaboration (Das & Teng, 2002; Urriolagoitia & Planellas, 2007). Resources and staff need to be assigned to the alliance. In this stage, conﬂicts (e.g., on money issues, operational procedures, and interpersonal or intercultural differences (Kanter, 1994)) are most likely to occur and need to be resolved. Evaluation stage: During this stage, ﬁrms need to compare the original alliance objectives with the objectives of the alliance. As ﬁnancial measures are not always sufﬁcient to capture the value of the alliance (Lorange & Roos, 1992), several performance indicators should be taken into account (e.g., evaluation of the collaboration process, the commitment of the partner, learning possibilities). This stage does not necessarily take place at the end of the ALC. During each of the previous stages, ﬁrms should evaluate the alliance and decide on its future. Depending on the result of the evaluation, several options are possible: an alliance can be continued, renegotiated, spun off or ended, or a mixture of the previous options (e.g., ﬁrst renegotiated and then later spun off). Alliance renegotiation or termination does not necessarily imply that the alliance has failed. It is, for instance, possible that external (e.g., changes in the competitive environment) or internal (e.g., a technological breakthrough in one of the companies) conditions have changed and that renegotiation or termination is just the best option for the alliance (Das & Teng, 2002).

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In order to be able to deﬁne the stage-speciﬁc tasks, which need to be accomplished, uniformity between the different ALC models is necessary. Based on the ﬁve stages mentioned above, we have analyzed the different ALC models and have incorporated the existing models into our ALC model. By comparing the descriptions the authors gave for each of the stages in their models, we could either incorporate two or more stages into one of our ﬁve stages or we could stretch a stage over several stages in our model. Table 2 shows how each of the existing models ﬁt within each of the ﬁve stages. Based on the ﬁt between the different models, we were able to integrate deﬁnitions, descriptions, and relevant actions for each of the ﬁve stages. In the next section we will elaborate on this.

3.2. Alliance Life Cycle: Stage-Speciﬁc Capabilities and Skills In this section, we break down the concept of alliance capability in different micro capabilities, which are stage speciﬁc. In order for companies to be able to develop above-average levels of alliance capability, companies need to comprehend, support, and execute the key actions and skills of the different stages. Ritter and Gemunden (2003) point out the need for the identiﬁcation of critical resources, activities, and tools to create ‘‘best practices’’ with regard to network capability. Based on the literature review, we were able to put forward the important activities that can contribute to each of the ﬁve capabilities. Table 3 presents an overview of the stage-speciﬁc goals and key skills in each stage of the ALC. In order to create more knowledge on the alliance management process, ﬁrms need to amplify and internalize the knowledge held by individuals in the organization (Nonaka, 1994). Several studies have already emphasized the beneﬁts of intraﬁrm knowledge and competence transfer (Argote, Ingram, Levinec, & Moreland, 2000). By building operational routines, that enable the ﬁrm to develop a collective understanding about the execution of tasks, ﬁrms can increase their performance signiﬁcantly (Nelson & Winter, 1982). Zollo et al. (2002, p. 709) investigated the role of interorganizational routines on performance and concluded, ‘‘yRoutines may contribute to the performance of the alliance by facilitating the information gathering, communication, decision-making conﬂict resolution, and the overall governance of the collaborative process.’’ This conclusion can easily be transferred to an intraﬁrm context, by assuming that ﬁrms will improve their alliance success through installing learning mechanisms that can capture and spread the knowledge on the alliance management process. If an organization wants

Selection of a suitable partner

Create shortlist of potential partners Screen for business compatibility Screen for compatible goals Due diligence

Strategic alignment between alliance business case and corporate strategy

Evaluate alliances as a strategic option Determine ﬁt with overall strategy Determine ﬁt with overall strategic vision

Actions

Search stage

Quantify goals Determine evaluation measures Determine both parties’ contributions to the alliance Deﬁne legal clauses

Realize agreement on the alliance conditions and legal elaboration

Creation stage

Compare alliance goals and outcomes and decide on alliance future Evaluate outcome Evaluate collaboration process/result Consider joint and private beneﬁts Determine the future of the alliance

Effectively manage day-to-day operations

Ensure operational and cultural integration Trust building Determine resource allocation

Evaluation stage

Operation stage

Stages in the Alliance Life Cycle

Alliance Subcapabilities.

Goal

Strategy stage

Table 3.

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to implement a knowledge management program in which they aim for the transfer of knowledge among and between employees and the ﬁrm, Leavitt’s (1965) classical model of organizational change can provide insight. The model breaks down the organization into four interacting components (task, structure, technology, and people) and requires the change agent to examine the impact from a human, technological, and structural perspective. The model suggests that the task (in our case the management of an alliance) is to be achieved by having a coordinated and balanced approach to the three inﬂuencing factors: structure, technology, and people. The model suggests that the four components must be coordinated and balanced to create an effective knowledge management culture (Hurley & Green, 2005). By providing each stage with the right structure, technology, and people, ﬁrms should be able to support each speciﬁc capability and hence also the alliance capability of the ﬁrm. Structure: In the model, structure is deﬁned as a system of communication, system of authority, and system of workﬂow. Several models have been proposed as an attempt to depict these organizational relationships (see e.g., Mintzberg, 1979). Mintzberg (1979, p. 2) deﬁnes structure as the sum of the ways in which it divides labor into distinct tasks and then achieves coordination among them. In alliance literature, the focus has been put mainly on functional and stafﬁng solutions. The alliance function can be considered as the linking pin of organizational knowledge on alliances. It can act as a focal point of learning and leveraging of lessons from prior and ongoing alliances, as a visible point of contact for external parties, and it creates legitimacy which is needed to attract the necessary resources to the alliance (Kale et al., 2002; Heimeriks, Klijn, & Reuer, 2009). The need for a separate alliance function and especially for an alliance manager has been underlined several times in the literature (Spekman et al., 1998; Dyer et al., 2001; Kale et al., 2002). Spekman et al. (1998) describe the changing role of the manager during the ALC. In each of seven distinguished stages, they propose a different role for the manager, according to key activities that have to be performed. They propose the following roles for the manager during the life cycle: visionary, strategic sponsor, advocate, networker, facilitator, manager, and, ﬁnally, mediator. Hoffmann (2005) investigated the multi-alliance management practices of 25 leading European companies and found that most of them have created, in varying degree, very specialized alliance roles and positions. In addition to the function of an alliance manager (the operative executive), companies have installed sponsors (responsible for the alliance at senior

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executive level), internal consultants (a pool of internal specialists who provide technical support), and a relationship manager (contact person for a speciﬁc alliance partner at the operational level). At BU level they have installed an alliance coordinator (internal contact person or coordinator for an alliance or all alliances within a speciﬁc ﬁeld of business), an alliance governor (nonoperative supervisor who supports and monitors the cooperation unit) and a vice-president of alliances (head of the central alliance department). We would like to emphasize the importance of a structural position that supervises the total alliance process at alliance and BU level, which we will call a process manager. Given the wide variety of specialist skills and knowledge that is needed to successfully ﬁnish all stages of the alliance, it is virtually impossible that one person can manage all aspects of the process. Nevertheless, it is necessary that one (or more) person(s) maintain(s) the overview over the different stages. This person needs to closely monitor the total alliance process, making sure the right people are involved in each stage and sufﬁcient resources are dedicated to speciﬁc alliances. Technology: Technology is to be understood as all management systems, tools, and processes that can support the creation and transfer of alliance knowledge. Firms can use several tools to provide guidelines and to encourage learning about alliances, such as written policies/procedures, job rotation, work schedules, databases, intranet, codiﬁed best practices, network software, creation of knowledge networks, culture programs, brainstorm sessions, etc. (Duysters, de Man, & Wildeman, 1999; Alavi & Leidner, 2001; Heimeriks & Duysters, 2007; De Man & Duysters, 2007). Also, evaluation techniques reside under this category. Through evaluation of both the ongoing alliance and past alliances, ﬁrms can draw conclusions with regard to the future of the ongoing alliances. Several techniques can be used such as benchmarking, checklists, individual or cross-alliance evaluation, collective assessments (with the partner company), and zero blame reports (partners assess each other on a number of criteria without blaming each other; Spekman et al., 2000). Hoffmann (2005) proposes a model whereby ﬁrms need to evaluate alliances on three levels: individual alliance level, portfolio at business level, and portfolio at corporate level. Although the focus of these evaluations has been put mostly on ﬁnancial (such as proﬁt or cash ﬂow) and strategic (such as goal attainment) measures, other factors need also be taken into account such as relational factors (trust, communication, commitment), the partners’ expertise in certain domain (e.g., technological or market knowledge) and input factors (staff, investments, etc.).

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People: By dedicating people in the alliance management processes that possess the right skills, knowledge, attitudes, and competences, ﬁrms can improve their alliance capability. This requires that workers create tacit knowledge through their routine tasks (i.e., learning-by-doing) and internalize that knowledge so that it becomes explicit (i.e., so they can share it with others). This sets the stage for sharing the information through structural mechanisms. Aside from learning-by-doing, ﬁrms can enhance knowledge creation and transfer by offering employees the opportunity to learn more on alliances or to share insights and ideas. Alliance management training can help employees to gain more insight in, for example, the critical success factors of alliance management, the company’s (alliance) strategy, the company’s goals, or it can help to develop certain skills such as negotiation skills or evaluation skills (Heimeriks et al., 2009). Both in-house and external training can be useful and several training possibilities are available such as seminars, workshops, discussion forums, role-playing, group discussions, case reviews, and lectures. Firms can also involve external parties (Prevot, 2006) during different stages of the alliance process to provide specialist knowledge on certain aspects of the process or to complement some of the alliance practices that were mentioned before. Examples are consultants, mediators, alliance partner search ofﬁces, ﬁnancial experts, and legal experts. Although this may seem appealing, we would like to emphasize that ﬁrms need to build their own capabilities and not simply rely on external parties. The services that these external parties provide will however only lead to competitive advantage if they can be combined with unique internal skills and knowledge on the process.

4. SUPPORTING ALLIANCE CAPABILITY THROUGHOUT THE ALC Based on the classiﬁcation above, our previous table can be extended by inserting the three organizational approaches in each of the stages. By doing so we try to provide insight in the methods and mechanisms a ﬁrm can use to deploy or transfer capabilities. In Table 4, we have highlighted some of the methods and mechanisms a ﬁrm can implement according to each of the three approaches to support de development of each of the ﬁve subcapabilities. We emphasize that a good balance between the different tools is crucial to obtain a good result.

Structure

Alliance manager (as visionary and sponsor) Alliance sponsor Communication linkages between strategic and operational BUs

Alliance manager (as sponsor) Structural (communication) linkages with strategy unit Involvement of external specialists: alliance search bureaus

Alliance manager (advocate role) Involvement of external specialists: lawyers, mediators and/or accountants Linkage structures with legal and ﬁnancial department need to be involved

Alliance process manager Alliance manager (networker, facilitator,mediator) Involvement of external specialists: management consultants Linkage structures with current operations

Ensure operational and cultural integration Trust building Determine resource allocation Operational management

Quantity goals Determine evaluation measures Determine both parties’ contributions to the alliance Deﬁne legal clauses Trust building Determine operational clauses

Create shortlist of potential partners Screen for business compatibility Screen for compatible goals

Evaluate alliances as a strategic option Determine ﬁt with overall strategy and vision

Actions

Effectively manage dayto-day operations

Realize agreement on the alliance conditions and legal elaboration

Selection of a suitable partner

Operational capability

Operation Stage

Strategic alignment between alliance business case and corporate strategy

Goal

Alliance capability

Creation Stage

Creation capability

Strategic capability

Capability

Search Stage

Transfer Mechanisms (Based on Literature Review).

Search capability

Strategy Stage

ALC

Table 4.

Alliance manager (mediators) Structural linkages to people involved in all of the ALC stages

Evaluate outcome Evaluate collaboration process/results Consider beneﬁts for own company and for partner Determine the future of the alliance

Compare alliance goals and outcomes and decide on alliance future

Evaluation capability

Evaluation Stage

How to Build Alliance Capability: A Life Cycle Approach 189

Search capability

Alliance database Social network software Screening procedures Due diligence checklists Partner selection programmes Intranet

Training in open system thinking Training in competence analysis Skill training (communication, networking, etc.)

Strategic capability

Strategic grid with priority rankings Policy an alliance strategy Interdepartmental meetings Intranet

Strategy training Management training Alliance training

Capability

Technology

People

Search Stage

Strategy Stage

ALC

Training in legal issues Negotiation skill training Training in ﬁnancial issues Training in intercultural differences (negotiation)

Alliance database Procedure on alliance negotiation Payment policies (royalties, fees, etc.) Financial tools (for risk analysis, valuation, etc.) Legal policy Intranet

Creation capability

Alliance capability

Creation Stage

Table 4. (Continued )

Training in conﬂict management training in intercultural differences (operations) Projects management training

Project management

Operational capability

Operation Stage

Training in analytic skills Training in synthetic skills Developing learning attitude

Alliance database Alliance metrics Evaluation checklists (for ﬁnancial and strategic performance, relational factors) Benchmark techniques Cross-alliance evaluation Individual alliance evaluations Joint evaluation (zero blame reports) Intranet

Evaluation capability

Evaluation Stage

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Strategic capability: A structural support can be given by installing a dedicated alliance function. In this stage, the alliance manager needs to fulﬁll the role of visionary (Spekman et al., 1998). He will formulate, articulate, and promote the alliance to both CEO level and the operational level. To ensure communication between strategic units, who may initiate the idea of alliance strategy, and the operational units, structural linkages between the different departments need to be encouraged. Firms can use several guidelines to simplify the strategic decision making. Interdepartmental brainstorm sessions and meetings (Prevot, 2006) can create new insights on market developments or opportunities, which ﬁrms can achieve through alliances. A strategic grid that captures the ﬁrm’s strategic goals (in products, markets, etc.) and signals priorities (Which are the top growth strategies of the ﬁrm? Which are viable options? Which options will not be taken into account?) can serve a guideline in the process. A handbook or policy on how the ﬁrm thinks about alliance strategy within the ﬁrm and or the BU and an intranet site that provides people with adequate information can improve the task execution. For people to be able to think strategically about alliances, a sound training in strategic (alliance) management is necessary. Search capability: To encourage people throughout the company to be alert for business and partner opportunities and to approach and screen potential partners, several mechanisms can be used. An alliance manager that sponsors not only speciﬁc alliances, but the general idea of partnering, and who encourages people to be constantly on the watch for opportunities can help in creating the right culture. An effective and up-to-date alliance database that contains information on other companies (their core business, patent information, research domains, ﬁnancial information, etc.) is crucial here. To perform effective and thorough due diligence, checklists and screening procedures are needed. This ensures a standard screening method (De Man & Duysters, 2005; Bierly & Gallagher, 2007). Holmberg and Cummings (2009), for example, propose an elaborate analytical tool to help companies to select alliance partners. In addition, intranet can be used to provide the people with the strategic grid, which can serve as a guideline during their search. In order to create the atmosphere of opportunity seeking behavior and out-of-the box thinking, people can be trained in open-system thinking and be encouraged to actively participate in seminars, conferences, trade fairs, etc. To ensure compatibility between the partners, competence training or information sessions (what are our core competences and which competences are we looking for?) can be helpful. People need to be kept

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up-to-date within their own specialist ﬁelds (through training, literature, journals, meetings) to make sure they are able to accurately screen the partners (Prevot & Spencer, 2006). Creative capability: This capability relies heavily on specialists within or outside the company. Legal and ﬁnancial specialists can either be involved from other departments in the company, through structural linkages, or can be bought on the market when internal specialists are not available. The ﬁrm can provide procedures on the negotiation process (the way things are negotiated) and can provide payment (guidelines on royalties, upfront fees, etc.) and legal (guidelines on the governance of the alliance, exit clauses, etc.) policies. A database that captures previous agreements and conditions and deal information on the sector, can provide employees with guidelines during the negotiation process (Heimeriks & Duysters, 2007). People not only have to be trained in speciﬁc domains (alliance ﬁnance, alliance legal governance), but need also be aware of the intercultural differences that exist between entities with regard to negotiation style (De Man & Duysters, 2005). Operational capability: A relationship manager (Hoffmann, 2005) at the operational level, who can serve as a contact person for the alliance partner, can help to create trust and good communication between companies. Furthermore, the alliance manager in this stage needs to ensure commitment of all parties, oversee the operation of the ongoing alliance and perhaps mediate conﬂicts between partners or between people involved in the alliance. If necessary, assistance of consultancy ofﬁces that are specialized in alliance management can be used. Structural linkages with the overall operational core of the rest of the company is necessary, to guarantee the encapsulation of the alliance in current operations. To facilitate day-to-day management of the alliance, project management techniques (e.g., project charters, status reports, communication plans) can be used. People need to be trained in these techniques and be given insights in intercultural differences with regard to operational procedures. Evaluation capability: The ﬁrm must provide structural communication linkages to people in all stages of the ALC. This will contribute to a thorough and multidimensional evaluation. A database with previous evaluations and lessons learnt needs to be constantly kept up-to-date and actively used. In order to be able to compare alliances, standard evaluation sheets and metrics can be used (De Man & Duysters, 2005). Metrics should be used for ﬁnancial outcomes as well as for relational and operational factors. Firms can evaluate individual alliances, compare

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several alliances the company has engaged upon, or can stimulate joint evaluations, where partner companies are actively involved (De Man & Duysters, 2007, Draulans et al., 2003). An example are the zero-blame reports (Spekman et al., 2000) in which companies are encouraged to provide feedback on the alliance as a whole, without blaming each other for shortcomings. To evaluate outcomes, people need to possess analytical skills, which enable them to extract crucial information out of a case and be able to interpret the results in the context of the alliance. Synthetic skills are also necessary to be able to see the bigger picture, and to comprehend and transfer the most important lessons that can be learnt from the experience. Therefore, ﬁrms need also to foster a learning attitude, which encourages people to critically evaluate events and to be open for lessons that can be drawn. In addition to stage-speciﬁc capabilities, a company should also manage organizational context variables, which do have an impact on the global ALC. In order to enhance alliance knowledge creation and transfer, the ﬁrm needs to create a setting in which communication, openness, and learning is encouraged. Although these organizational characteristics do not make up the core of this paper, we brieﬂy mention some of them. Ritter and Gemunden (2002. 2003)) refer to these context variables as antecedents for network competence and have found empirical evidence that these positively contribute to alliance capability. An important condition for the improvement of alliance capability is the ﬁrm’s commitment to their alliance portfolio by investing in internal resources that support the alliance management. Human resource management has to be aligned with the alliance strategy of the ﬁrm. For example, personnel can be selected and evaluated based on their network-orientation (their focus on network abilities and experience) and social skills (e.g., empathy, emotional stability, communication ability) in order to further enhance information exchange and alliance learning (Spekman et al., 2000). The ﬁrm needs to provide ﬁnancial, physical (computers, board rooms, etc.), human, and informational resources, which will enable the execution of the management tasks (Ritter, 1999). Firms can also improve their alliance capability by stimulating communication between members of the organization. Both formal and informal information sharing can lead to new insights in the alliance management process. Ritter and Gemunden (2003) has shown that ﬁrms with higher levels of integrated communication structures (intensive cross-departmental communication) managed to achieve higher levels of alliance capability, than ﬁrms with only limited communication integration.

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Firms can foster interdepartmental communication by installing both formal mechanisms (such as brainstorm sessions, evaluation meetings, cross-functional seminars and workshops, intranet, and job rotation) and allowing informal information exchange. Open communication also resides in a broader context, hence an open corporate culture. Ritter and Gemunden (2003) describes an open corporate culture in terms of ‘‘emphasizing ﬂexibility, spontaneity, and individuality’’ where cooperation, tolerance, and respect for other parties are important values.

5. CONCLUSION The aim of this paper was threefold. First, we have presented a comprehensive literature review on the concept of alliance capability. From this review it became clear that too little attention is being dedicated to the building process of alliance capability. Although several authors have investigated the role of alliance experience, the importance of an alliance function, and the antecedents of alliance capability, research has not yet focused in detail on the various capabilities which are important throughout the different stages of the ALC. We acknowledge the importance of the general organizational context, but stress that there is a need to look into the speciﬁc skills and tasks that need to be fulﬁlled in each stage in order to improve alliance capability. Therefore, in the second part of this paper, we have examined the different components of alliance capability. We have distinguished ﬁve subcapabilities, which are each linked to a stage in the ALC: strategic capability, search capability, creative capability, operational capability, and evaluation capability. Based on a literature review, we were able to describe the most important tasks that need to be executed during each stage of the ALC. Furthermore, we have underlined the importance of a process manager, who supervises the global alliance management process and guarantees that the right people are involved in each stage and sufﬁcient resources are dedicated to speciﬁc alliances. Finally, we have extended this model by describing several (learning) mechanisms that can support each of the ﬁve subcapabilities. We have provided recommendations in three ﬁelds: structures, technologies, and people. We argue that in order to build alliance capability, a ﬁrm needs to provide the right structures and management tools/techniques for each stage in the alliance process and select, train, and evaluate people based on both their speciﬁc and network skills. We have placed our model in a broader organizational context, by brieﬂy touching

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upon some organizational variables, which are important for the creation of alliance capability. This study tries to complement earlier studies on alliance capability – that have mostly considered alliance capability as one metacapability at corporate level – by looking into the requirements of the different substages of the ALC. In each of these stages, speciﬁc tasks need to be fulﬁlled and speciﬁc goals need to be attained, therefore in each stage a company needs to build a speciﬁc capability. A company can then improve the effectiveness of their alliance management by building each speciﬁc capability, by building organizational linkages between the capabilities that ensure a solid global process management (e.g., through the global process manager), and by providing an alliance-oriented structure and culture.

5.1. Lessons for Managers Managers should be aware that in order to build an effective alliance management, ﬁrms need to engage in actively building alliance capability. By capturing and sharing alliance management know-how and by learning from previous alliance experience, ﬁrms can improve their alliance management process, which will contribute to alliance success. In this paper we stress that alliance capability can be improved at three levels: Macro or corporate level: Create an alliance-oriented structure and culture that encourages collaboration, communication, learning, and an open mindset toward alliances. Meta or alliance and/or alliance portfolio level: Provide structural linkages that enable effective management of the total alliance process. A global alliance manager can act a as a linking pin, making sure the right people are involved at the right time, attracting resources, and gathering and dispersing knowledge over the total alliance process and/or a number of different alliances. Micro or alliance stage level: In each stage of the ALC, speciﬁc tasks need to be fulﬁlled and speciﬁc goals need to be attained. Therefore, in each stage a company needs to build a speciﬁc capability. We have found ﬁve subcapabilities (a strategic, search, creative, operational, and evaluation capability) and we propose a number of tools that can help the ﬁrm to support each of these subcapabilities. We emphasize the importance of the micro level, as in the past too little attention has been paid to this aspect of alliance capability. Firms need to be

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aware of the very diverse demands that are posed upon the ﬁrm in each stage of the ALC. Managers should actively manage each of the stages and build the alliance-speciﬁc capabilities by providing the adequate structures, management tools/techniques, and people in each stage. Alliance experience creates a great potential to internally build, adapt, and review alliance management systems because the current alliance capabilities get challenged in every new alliance. Over time, ﬁrms can develop certain efﬁcient approaches and ‘‘best practices’’ to handle the alliance process. After a certain amount of experience, the additional learning effect might stagnate and the inﬂuence of a new partner on the current management system might be diminishing. For a ﬁrm that has no or little alliance experience, forming an alliance with a partner that has a well-developed alliance management system can be very valuable. The inexperienced ﬁrm might be able to draw important lessons with regard to the approach the other company uses and be able to faster climb on the learning curve. The main goal of the alliance will be to achieve a certain (strategic) goal such as gaining market share, developing a new product or service, or build a new technology. Nevertheless, we think companies should also be aware of the learning potential an experienced partner can offer in the ﬁeld of alliance management knowledge. By looking at the partner’s approach on the alliance process, its internal structures, processes, tools, and dedicated human resources, the focal company can evaluate and improve its own internal alliance management process. A more effective alliance management process might also be a key in a more effective and/or efﬁcient achievement of the strategic goals of the alliance.

5.2. Limitations and Future Research This study has only started to explore this domain and therefore there are several ways to further elaborate and complement this study. We here propose two avenues for future research. Because of ﬁrm-speciﬁc characteristics, competitive environment, and history, ﬁrms differ widely in the level of alliance capability they posses. To control for these interﬁrm differences and to empirically test the model we have put forward, we will start our research with an in-depth case study in a large, multinational company. Through interviews with key players within the alliance team we will study the current alliance management approach and its evolution over the past years. We would like to gain more insights in the ALC of R&D alliances and deﬁne the various goals and tasks in each phase.

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This paper has elaborated on the general internal learning mechanisms, which a ﬁrm can install in order to improve its alliance management. Our model can be situated at the fourth level of Mo¨ller and Svahn’s (2003) network management scheme, that of relationship management. We are aware that individual relationships need to be managed as a part of an interrelated portfolio of relationships and that different types of portfolios, relations, or partners need different managerial approaches (Ford et al., 1998; Mo¨ller & Halinen, 1999). Although we do not aim to integrate all these issues and levels of management, we plan to investigate whether different types of alliances – whether they are core or noncore, with a research or marketing goal – are managed in a different way. With a quantitative survey, we wish to further reveal learning mechanisms in the three categories (structure, technology, and people) and will empirically test their presence and importance in the alliance capability building process in these different types of alliances. We will also take into account control variables such as company size and alliance experience. We want to get insights in certain popular learning mechanisms and analyze whether certain mechanisms are more useful in speciﬁc stages of the ALC.

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MODELING ENTREPRENEURIAL ACTION CHOICE: FROM INTENT THROUGH RHETORIC TO ACTION Janice A. Black, Richard L. Oliver and Lori D. Paris ABSTRACT Entrepreneurs are action takers. This paper presents an agent-based model illustrating entrepreneurial action choices between rhetoric and action during the very early stages (pre-formal alliance) of an entrepreneur’s journey. Environmental factors, inertia, entrepreneurial conation preferences, the context-for-learning, and identiﬁed opportunities are all factors that will inﬂuence action choices both separately and in conﬁgurations. In virtual experiments, we examine the length of time it takes entrepreneurs to reach the stage for opportunity commitment, based on their skills and conation proﬁles. From the computer simulation, we determined that certain entrepreneurial proﬁles do make a difference in the overall effectiveness and efﬁciency of reaching an opportunity commitment. In general, an entrepreneur is more effective in reaching opportunity commitment if the entrepreneur has either a high skills proﬁle, or a high conation proﬁle, while the combination of high-level skills and conation proﬁles do not provide any real advantage. A high skills proﬁle proves to create the greatest advantage of reaching opportunity commitment in the shortest length of time.

Enhancing Competences for Competitive Advantage Advances in Applied Business Strategy, Volume 12, 201–233 Copyright r 2010 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1108/S0749-6826(2010)0000012011

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Entrepreneurship is inherently about action taking. Entrepreneurs bring together the necessary market and social components to enact their vision of the future (Kirzner, 1973; Cornelius, Landstro¨m, & Persson, 2006). New ventures would not emerge (Lichtenstein, Carter, Dooley, & Gartner, 2007) without emergence activities, which include personal commitment, obtaining ﬁnancial support, hiring people, and having sales (Reynolds, 2000; Carter, Gartner, & Reynolds, 1996; Reynolds & Miller, 1992). Indeed, two major action choices for a nascent entrepreneur are between entrepreneurial rhetoric or talk (talking in general about their opportunity idea; hereafter referred to as ‘‘talk’’; O’Connor, 2002; Greve & Salaff, 2003; Fletcher, 2006) and entrepreneurial events (building a speciﬁc entrepreneurial support network, entrepreneurial team; hereafter referred to as ‘‘act’’; Greve & Salaff, 2003). Sarason, Dean, and Dillard (2006) call for inquiry into the contextual nature of action choices. Action choices of entrepreneurs will vary in detail across the various stages of the entrepreneurial process (Greve & Salaff, 2003; Chu, 1996) as does the proportion of rhetoric to events across phases (Greve & Salaff, 2003). Given that the transitions between entrepreneurial stages are inconsistent (Bhave, 1994) and the transitions between primarily rhetoric or event action choices is also not well understood (Greve & Salaff, 2003), holistic evaluations of the entrepreneurial system (the explicit internal and external factors involved) are warranted.

ENTREPRENEURIAL ACTION CHOICES Several scholars have proposed names for various phases of opportunity development and entrepreneurial development by the entrepreneur (entrepreneurial propensity, Learned, 1992; entrepreneurial intent, Bird, 1988; nascent entrepreneur, Lichtenstein et al., 2007; opportunity acknowledgement, Gregoire & Shepherd, 2004; opportunity identiﬁcation, Shane & Venkataraman, 2000; opportunity recognition, Kirzner, 1979; opportunity development, Ardichvili, Cardozo, & Ray, 2003; entrepreneurial opportunity, Long & McMullan, 1984). All of these concepts can be placed into stage theories of entrepreneurship and/or opportunity recognition. One commonly used stage theory by Long and McMullan (1984) is comprised of Pre-vision, Vision, Elaboration and Decision. Wilken’s (1979) stage theory consists of Motivation, Planning, and Execution. Typically the phases begin with entrepreneurial talk (Wilken’s phase 1: Motivation) followed by entrepreneurial acts (Greve & Salaff, 2003). Such acts may include the emergence of personal commitment (Reynolds & Miller,

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1992), the development of appropriate social and economic networks (Wilken’s phase 2: Planning), or the actual bringing together of the economic components of a new venture (Wilken’s phase 3: Establishment or Reynolds and Miller’s ﬁnancing, hiring, and selling). However, the transitions between phases is not automatic (Bhave, 1994) nor does it occur with the same timing across organizations (Greve & Salaff, 2003; Lichtenstein et al., 2007). Furthermore, there has been little work on the dynamical interplay between entrepreneur and opportunity (Sarason et al., 2006) and researchers have been called to examine more ‘‘between’’ places and times (Antal, 2006). Therefore, the purpose of this paper is to create a computer simulation of dynamic interactions between entrepreneurs, opportunities, the environment and their early entrepreneurial discussion networks, and then explore the timing of reaching the phase of making a formal entrepreneurial support network. Researchers have begun to realize the importance of both entrepreneurial talk and acts, when understanding the entrepreneurial process. For example, much of O’Connor’s discussion of entrepreneurial stories demonstrates how the potential entrepreneur is clarifying his or her thinking about a potential opportunity during the discussion (O’Connor, 2002). This type of discussion would happen in the early pre-vision and vision stages of Long and McMullan’s model. In another example, Greve and Salaff (2003) found that entrepreneurs are expected to carefully discuss their ideas (entrepreneurial talk) with a small circle of close individuals in the motivation phase before they commit themselves publicly (entrepreneurial act) by talking with a larger set of individuals. Once there is public personal commitment then the entrepreneur moves into Wilken’s (1979) planning phase. During this phase, the entrepreneur will spend much time testing out his or her ideas (Kamm & Nurick, 1993), both telling and adjusting his or her entrepreneurial story to ﬁt the knowledge and conditions facing the entrepreneur (entrepreneurial talk) (O’Connor, 2002; Fletcher, 2006). The entrepreneur also gains needed skills and resources (entrepreneurial acts) (Greve & Salaff, 2003) through various social network activities (entrepreneurial acts) (Chu, 1996). Once these resources are gathered and the plan of action is clariﬁed, the entrepreneur takes the ﬁnal step and actually implements his or her plan, thus entering the establishment phase. During the establishment phase, the entrepreneur’s main focus is on entrepreneurial acts, such as selling his or her product or service, but he or she will maintain communication with various members of his or her social network to further enhance entrepreneurial discussions (Greve & Salaff, 2003).

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Timing of engagement for each action choice will vary and some action choices occur simultaneously (McCarthy, Krueger, & Schoenecker, 1990). For example, an entrepreneur contacts a member of her social network to explain how the new venture will be organized. This contact results in both an entrepreneurial act (contacting the network member) and entrepreneurial talk (describing the envisioned organization) taking place simultaneously. Projecting speciﬁc and separate occurrences of these actions is highly problematic (Sarason et al., 2006) because they are deeply intertwined in the entrepreneurial process (O’Connor, 2002); however, projecting when patterns of occurrences will happen is possible (Lichtenstein et al., 2007). We are interested in determining when entrepreneurs choose to talk and when they choose to act. To do this, we need to ﬁrst examine what we know about entrepreneurial action choice decisions.

COMPONENTS AFFECTING ENTREPRENEURIAL ACTION CHOICE Because the timing of the phases vary for each entrepreneurial venture (Greve & Salaff, 2003), activity proportions vary between talk and acts (McCarthy et al., 1990). Also, the transitions both within and between phases are not automatic (Bhave, 1994), and the entire entrepreneurial system, even when not fully developed, is involved (Sarason et al., 2006). Thus, we expect that the entrepreneurial action choice is somewhat like a strategic change choice (Hill & Levenhagen, 1995). Decisions should be made while the people and conditions present will affect and be affected by the decisions (Sarason et al., 2006). Conditions that affect the entrepreneurial action choice are similar to conditions that favor a strategic change choice (see the early linkages between entrepreneurial behaviors and strategic change in Stevenson & Jarillo-Mossi, 1986). These decisions happen within an environmental context. Environmental Context Entrepreneurial actions take place within contexts that are composed of the critical attributes of the system outside of the individual with a propensity toward entrepreneurial endeavors (Learned, 1992). Following the parallelism with strategic choice mentioned earlier, we will consider the general environmental conditions found in typical strategic external analyses.

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Because an opportunity may expand an existing market, span more than one market, or develop a new market, focus will be on those general environmental conditions found in the PESTEL analysis (the Political, Economic, Sociocultural, Technological, Environmental and Legal contexts – Carpenter & Sanders, 2009, p. 109). Opportunity deﬁnition is also embedded in the larger system. For this paper, we will take a structural perspective that the market system forces interact to create potential opportunities (Lichtenstein et al., 2007) and thus the deﬁnition of what an opportunity consists of is preexisting to our model. However, the entrepreneur still discovers which opportunities to pursue since there is no guarantee that any one opportunity is right for them personally (Gregoire & Shepherd, 2004).

Personal Conditions From the strategic change literature we know that even when the time is ripe for organizational change, some organizations will take action, some will take inappropriate action, and some will be stuck in inertia (Gilbert, 2005). So too, we expect that inertia will impact the entrepreneur’s choices. At the organizational level, inertia has two components: resource rigidity and routine rigidity (Gilbert, 2005). For an entrepreneurial effort, these are resource inadequacy and routine rigidity. Entrepreneurs are noted for taking action in the face of inadequate resources (Hill & Levenhagen, 1995; Stevenson & Jarillo, 1990) (which is based on the entrepreneur’s conation proﬁle and addressed later) leaving routine rigidity then as the major inertia source. Schemas or mental models are notoriously difﬁcult to change (Reger & Palmer, 1996). During the early stages of the entrepreneurial effort, schema are being developed (Abelson & Black, 1986), and represent the integration of experience and knowledge that is related to assessing, judging, and making decisions with respect to opportunity deﬁnitions, identiﬁcation, evaluation, venture creation, and so forth (Mitchell et al., 2002). Entrepreneurial schema arise from an entrepreneur’s intuitions and through the use of metaphors, are tested, and reﬁned until they become formal models and help to shape actions (Hill & Levenhagen, 1995). Thus, we anticipate that entrepreneurs will remain doing their previous action, whether talking or acting, until something helps or triggers them to change their activity.

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Inertia is overcome, because entrepreneurs are inspired with passion for the growth and development of their organizations and their commitment to the organization’s purpose. They tend to perform with or without rewards because they are driven internally by a sense of mission and purpose (Kerfoot, 2001). These individuals possess a heightened emotional connection to their organization that goes beyond job satisfaction (Gubman, 2004). They also possess ‘‘entrepreneurial intensity,’’ characteristics that allow them to stay focused and not distracted by instant gratiﬁcation because they have entrepreneurial vision (Liao, Murphy, & Welsch, 2005). Other stakeholders may still have inﬂuence (Greve & Salaff, 2003; Fletcher, 2006), but their passion is resilient and may vary by opportunity and via those social interactions. Furthermore, whether alone or in a team, entrepreneurs will choose categories of preferred actions (Black & Farias, 2005), thus, conation will be present (Berry, 1996). Entrepreneurial conation has two dimensions: a tolerance for ambiguity and for uncertainty (Black, 1998; Black & Farias, 2005). According to Black and Farias (2005), if an entrepreneur has a conation preference which reveals that the entrepreneur prefers to act in conditions of high ambiguity, then the entrepreneur will be more likely to choose environmental conditions which favor using ambiguity reduction skills such as sensemaking. If the entrepreneur prefers to take action in conditions of high uncertainty, then the entrepreneur will be more likely to choose environmental conditions which favor already knowing the ‘‘problem to be solved’’ and just need the solving to occur. Since these two dimensions are independent, the entrepreneur may ﬁnd him or herself choosing to act in conditions that require both high ambiguity reduction and high uncertainty reduction skills. Alternatively, an entrepreneur may prefer acting in environmental conditions that favor low levels of ambiguity and uncertainty or any level in between. Interestingly, organizational members tend to have conations relatively similar to the organizational leader (Black, Boje, & Rosile, 1997). Furthermore, a potential entrepreneur brings to the process the direct (Smith, Matthews, & Schenkel, 2005), codiﬁed (Gregoire & Shepherd, 2004), indirect (Smith et al., 2005), and tacit (Gregoire & Shepherd, 2004) skills and knowledge needed to pursue an opportunity. Direct and codiﬁed both seem to relate to information and skills that are easily transferable like formal education and routine technological skills. Indirect and tacit skills are those learned not about the ‘‘know-what’’ but rather about the ‘‘know-how’’ and thus require experiential learning (Loasby, 1999). Thus, we expect that the entrepreneur will have an idea of the necessary technical (industry related) and business (management related) skills (Gregoire & Shepherd, 2004)

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(hereafter called Skill Proﬁle) and a minimally acceptable environment for an opportunity (Kirzner, 1973). This perception may or may not match the actually needed skills and environmental conditions. However, entrepreneurs will make action choices based on their perceptions and insights and, in doing so, both determine and reveal more of those actually needed skills and environmental conditions (Black & Farias, 2000).

Opportunity Identiﬁcation and Organizational Emergence Processes Opportunity identiﬁcation, the ability to see a potential opportunity, and determine the skills and environment needed to pursue it, is an integral part of being an entrepreneur (Shane & Venkataraman, 2000; Sarason et al., 2006). From the earlier discussion of opportunity and entrepreneurial terms and the phases applicable to the pre-emergence of an organization, we determine the following set of processes (see Fig. 1). While we present the entire set of processes from the very ﬁrst conditions through to the emergence of an organization (see the four stage model of Long & McMullan, 1984), we are not interested in the full set of processes for this paper. We will focus instead on the process when the individual has entrepreneurial intensity up to the point where the nascent entrepreneur commits to an opportunity and is willing to engage in speciﬁc tailored entrepreneurial events (i.e., the gathering of a speciﬁc support team, entrepreneurial team, and other needed resources). We also overlay the stages as proposed by Long and McMullan (textured backgrounds) and Wilken (colored backgrounds). To begin, there is the relatively passive pre-vision stage of having entrepreneurial propensities (Learned, 1992) which holds until something occurs that triggers a proactive entrepreneurial intent (Bird, 1988). Then, the individual becomes aware of potential opportunities. Once the individual focuses in upon one such potential opportunity, the individual becomes a nascent entrepreneur and the potential opportunity becomes an acknowledged opportunity. Next, the nascent entrepreneur begins to compare what is needed for the opportunity pursuit with his or her personal qualiﬁcations (technical skill set, business skill set, conation levels, personal passion, personal understanding of the environment) and makes a choice about this acknowledged opportunity by talking generally to others about it or abandoning it and looking some more. If the choice is to pursue by entrepreneurial talk then the people with whom the nascent entrepreneur comes into contact with will

Something occurs

Wilken: Establishment Phase

Entrepreneur initiates entrepreneurial endeavor

Wilkin: Motivation Phase

Fig. 1.

Wilkin: Planning Phase

Long & McMullan: Elaboration Phase

or overlapping indicates forward movement indicates recidivism to earlier phase.

Summary of Pre-Organizational Emergence Processes.

Entrepreneur has sufficient resources to begin

Entrepreneur seeks those with complementary resources

Entrepreneur commits to opportunity

Nascent Entrepreneur begins testing idea of real opportunity with those who could help

Nascent Entrepreneur decides potential opportunity may be a real opportunity

Nascent Entrepreneur begins to talk about potential opportunity

Long & McMullan: Vision Phase

Individual with Upon matching skills with Entrepreneurial Intent potential opportunity, spots potential Nascent Entrepreneur opportunities emerges. Individual with Entrepreneurial Intent interacts with one or more potential opportunities

Long & McMullan: Decision Phase

Entrepreneurial Propensity

Long & McMullan: Pre-Vision Phase

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affect his or her passion. It takes a certain level of passion about the acknowledged opportunity to trigger the entrepreneur to move ahead and explicitly consider environmental conditions. When the opportunity becomes an identiﬁed opportunity, the nascent entrepreneur engages in public identiﬁcation with the opportunity. That public identiﬁcation results in a heightened passion for the identiﬁed opportunity and wider entrepreneurial discussions about it. The nascent entrepreneur also looks closer at the actual environment to determine if it will support the identiﬁed opportunity. As the nascent entrepreneur interacts with others, there is again a chance for others to affect the entrepreneur’s passion. Once a high level of passion is reached (i.e., that level is higher then the level of inertia that has been developing), then the entrepreneur moves to being committed to the opportunity. With a commitment to the opportunity and the beginning of assembling needed resources, formal plans, etc., the nascent entrepreneur moves to being a novice entrepreneur. Once sufﬁcient resources have been assembled, the novice entrepreneur now has an emerging organization. The Integrated Model Given previous research, we expect the following to impact entrepreneurial action choice: (1) the environmental conditions, (2) the deﬁned opportunity, (3) inertia, (4) conation preferences, (5) entrepreneurial passion, (6) personal skill sets in both technical areas and business areas, and (7) opportunity identifying processes. It is from the interaction of these seven components that the current action choice will occur. That choice may be an entrepreneurial act, entrepreneurial talk, or both. This general understanding results in the following model (see Fig. 2). However, this model is presented in a static version and the entrepreneurial process is thought to be highly interdependent with coevolution and mutual causality (Sarason et al., 2006; Lichtenstein et al., 2007). Thus, we need to examine this understanding dynamically that allows for the social structuration processes to be made explicit. An appropriate choice is that of a computational modeling (Ilgen & Hulin, 2000).

ACTION CHOICE AND COMPUTATIONAL MODELING Computational models or computer simulations allow for virtual experiments to be run (Ilgen & Hulin, 2000). There are various types of computational

Environmental Conditions 1

Opportunity Definition 2 Environmental Conditions

Both Event & Rhetoric

Action Choice

Personal Conditions

Conation Preference 4.1

Entrepreneurial Rhetoric

Opportunity Identifying Processes 7

Entrepreneur’s Technical & Business Skill Sets 6

Entrepreneurial Passion 5

Group Conation Pattern 4.2

Pre-Commitment Entrepreneurial Action Choice Model.

Entrepreneurial Event

Fig. 2.

Inertia in Action 3

Entrepreneur’s Conation 4

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models. System dynamics modeling has been successfully used in understanding the development and deployment of organizational resources (Kim & Park, 2006; Gary, 2005) while others have used the concept of linear programming (Emrouznejad, 2005; Korhonen & Syrja¨nen, 2004). However, recently more researchers have been using a form of computational modeling that arose from attempts to understand complex systems, agent-based modeling (Black, Oliver, Howell, & King, 2006; Siggelkow & Rivkin, 2005; Macy & Willer, 2002). Each form of computational modeling has its strengths and weaknesses (Ilgen & Hulin, 2000) and is appropriate to address different research questions. When issues of jointly constructed intangibles are involved (like the decision to pursue an opportunity), agent-based modeling is an appropriate research methodology (Black, King, & Oliver, 2005; Macy & Willer, 2002; Ilgen & Hulin, 2000).

The Deﬁnitions of the Agents An agent-based model requires a clear understanding of the various agents involved and their relationships with each other (see Figs. 1 and 2). Agents are those involved which can be engaged with others and change. In this paper, our agents included: the entrepreneur, his or her entrepreneurial discussion group as individuals, and the whole entrepreneurial discussion group including the entrepreneur as a group, the opportunity, and the environment as a collective level agent. An agent can simultaneously be an individual agent (the entrepreneur) and a part of a collective agent (the entire entrepreneurial discussion group). All agents will have a conation proﬁle. For the environment and the opportunity these reﬂect the level of ambiguity and uncertainty associated with the current conditions or speciﬁc opportunity deﬁnition. In addition to the conation proﬁle, the environment will also have a PESTEL proﬁle with values that indicate the degree to which these environmental conditions are present. The opportunity deﬁnition will have additionally, an environmental proﬁle which indicates the idealized environmental condition, a technical skill proﬁle and a business skill proﬁle which indicates the level of expertise needed in both the technical and business skills. We designate the entrepreneur at the individual level the ‘‘entrepreneur,’’ the individual members of his or her entrepreneurial team will be referred to as a ‘‘follower,’’ and the whole entrepreneurial group will be referred to as the ‘‘team.’’ The entrepreneur’s conation proﬁle reﬂects his or her preferred

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tolerance levels for ambiguity and uncertainty. The entrepreneur also has a technical skill proﬁle and a business skill proﬁle reﬂecting the level of expertise in those two critical categories of skills. Finally, the entrepreneur has a perceived environmental condition proﬁle that reﬂects his or her understanding of the current environment. The next step in the development of the agent-based model is to deﬁne the relationships between the agents. As is the case with any other research program, we are only concerned with the relationships involved in our phenomenon of interest, the entrepreneurial action choice. We need to now examine the relationships between our agents as they relate to entrepreneurial action choice. Additional literature reviews will be done as necessary.

Relationships among Agents Following social network research (Bowler & Brass, 2006; Skerlavaj & Dimo¨vski, 2006), relationships among agents are not necessarily symmetrical. This means that we will need to deﬁne the following categories of relationships: Individual-to-Environment, Environment-to-Individual, Individual-to-Opportunity, Opportunity-to-Individual, Individual-to-Self, Individual-to-Other Individual, Individual-to-Group, and Group-to-Individual. These relationships will provide the structure for the ABM and will follow the logic provided earlier in Fig. 1. Individual-to-Environment and Environment-to-Individual Since the ﬁrst independent variable in our model was the environment (see Fig. 2), we began by examining the set of relationships that are linked to the environment. One of the ﬁrst things to note is that the environment makes its impact only through individuals’ perceptions of the environment (Krueger, 2000). When we consider the kinds of environmental inﬂuences that impact the entrepreneur, we ﬁnd two general classes mirroring that found in strategic uncertainty research (Valliere, 2006): those that are outside of the entrepreneur’s inﬂuence and control and those within the entrepreneur’s control. Furthermore people tend to classify these two areas into opportunities and threats (Jackson & Dutton, 1988). This is not a one time process but an iterative ongoing process (Dutton, 1993). We will look at two types of environmental relationships (1) from forces outside of the entrepreneur’s control, the current opportunity, the current environment and (2) from earlier entrepreneurial control, the history of inertia in this area by the entrepreneur.

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Current Environment. Environmental perceptions are idiosyncratic to the individual (Krueger, 2000). Thus, the alertness of the entrepreneur to his or her environment is considered a critical skill (Kirzner, 1973). This implies that the conﬁguration of environmental factors and their perceived favorability will shift depending on the opportunity being evaluated by the entrepreneur (Pitelis, 2005; Anderson, 2000). Thus the second ‘‘environmental’’ relationship will be the perception of the favorability of the environment by the entrepreneur given a particular opportunity. Individual-to-Opportunity. This relationship looks at how individuals impact the opportunity. For this paper, individuals do not impact the opportunity. Once assigned, the values associated with any one competence are held constant for that run of the simulation. Opportunity-to-Individual. This is the relationship where opportunities inﬂuence individuals. This relationship will trigger the entrepreneur to stay in an area or move. If the entrepreneur has a skill set that is not required by the opportunity, then the entrepreneur will change locales. The other will change locales in the direction of conation proﬁles that is the best one that is closer than the current proﬁle ﬁt. This means that the other will look at the nearby locations, match the environmental conation proﬁles with his or her personal conation proﬁle, and move to the location of the best match. Note after initialization, the conation proﬁles for the environment are different by locale while the environment is set for the entire experimental space. Next, given the available set of opportunities, an entrepreneur will examine nearby opportunities for a match. The determination of a potential match by the entrepreneur sparks the public announcement of an interest and the ramping up of entrepreneurial talk. This changes a potential opportunity into an acknowledged opportunity and an individual with an entrepreneurial intent to a nascent entrepreneur. The choice to talk about the opportunity allows for closer inspection of the environmental characteristics to be considered and determination of degree of favorability. Unfavorable conditions spark a move, favorable ones spark more passion. Once passion is at a sufﬁcient level, the entrepreneur moves from a nascent entrepreneur to a novice entrepreneur. It is at this point of transition that this ABM concludes. Individual-to-Other Individual This category of relationships has three main components: the Individualto-Self, Individual-to-Other, and Other-to-Individual. The only between

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individual relationships (outside of the Individual-to-Self relationship) in this simulation are found in the acquisition of a new entrepreneurial team member. Individual-to-Self. While individuals involved here include both entrepreneur and followers, the only individuals with Individual-to-Self relationships in Table 1 are the Individual-to-SelfConation. Then there is the Entrepreneurto-SelfInertia., Entrepreneur-to-SelfPassion, and Entrepreneur-to-Self. Individual-to-SelfConation and SelfConation-to-Individual. Each individual in the simulation has a conation proﬁle. In this paper, we will hold the Individual-to-SelfConation stable by randomly assigning conation dimension values to the individual at the beginning of the model and not allowing any variation after that initial assignment. An entrepreneur’s conation proﬁle

Table 1. Ref. a b c d e f g h i j k l m n o p

Descriptive Statistics Across All Runs of Model: Pre-Commitment Processes. Item

No.

No. of conditions No. of potential opportunities/condition Total no. of potential opportunities (PO) Total no. of potential opportunities/ entrepreneurs No. of opportunity acknowledgments No. of opportunity acknowledgement recidivisms No. of opportunity acknowledgments without recidivism No. of opportunity identiﬁcations No. of opportunity identiﬁcations recidivisms No. of opportunity identiﬁcations without recidivism No. of opportunity commitments

9 2,500 22,500 125:1

No. of potential entrepreneurs/condition Total no. of potential entrepreneurs No. of potential Transitions/condition (entrepreneurs no. of iterations) Total no. of potential Transitions Total no. of actual Transitions or Emergences

20 180 10,000

Percent

855 793

3.93% of c; 44.54% of p 89.60% of e; 39.91% of p

92

51.11%;of k; 4.63% of p

166 87 79 56

90,000 1,987

0.74% of c; 8.35% of p 52.41%; of f; 4.38% of p 85.87% of e; 43.89% of k; 3.98% of p 0.25% of c; 31.11% of k; 2.82% of p

2.21% of o

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will impact his/her decisions and matching decisions that the entrepreneur makes are run through the lens of his or her conation preferences. For example, this proﬁle sparks the initial motivation to examine relationships. An individual will move from a set of relationships where they are dissimilar to the conation of others close by to an area where there is more similarity. This requires the examination between the individual’s personal conation proﬁle and the conation proﬁle associated with nearest potential opportunity. The entrepreneur will have tighter matching constraints than the follower because ultimately the entrepreneur is the one who will assume the market risk. Entrepreneur-to-SelfInertia and SelfInertia-to-Entrepreneur. To a certain extent, inertia acts as feedback providing stability across time. The more the entrepreneur engages with an opportunity (i.e., evaluates it, talks about it), the more inertia will increase. As described earlier, once schemas are developed they are difﬁcult to change. For this model, we anticipate that entrepreneurs will most likely continue doing their last entrepreneurial activity unless there is some overriding reason to change. For this model, that reason to change will be a combination of meeting content requirements and having the necessary passion. For example, even if all of the conditions are met to move from an acknowledged opportunity to an identiﬁed opportunity; but, there is an insufﬁcient level of passion on the part of the entrepreneur, inertia will dominate. Entrepreneur-to-SelfPassion and SelfPassion-to-Entrepreneur. For the entrepreneur, one of the strongest historical inﬂuences is his or her own consistency of involvement with and passion for his or her particular project (Reynolds, 2000; Carter et al., 1996; Reynolds & Miller, 1992). While this may initially reside inside the individual, research has shown that the development of this passion and desire to be an entrepreneur really is a communal result due to the entrepreneur’s interactions regarding this topic with others he or she trusts (Fletcher, 2006). This consistency and level of intent will dramatically rise after the entrepreneur has made a personal and public commitment to the new venture (Cardon, Zietsma, Saparito, Matherne, Davis, 2005; Chowdhury, 2005). Passion reﬂects the history of the entrepreneur’s personal assessment of an opportunity but is also inﬂuenced by those with whom the entrepreneur has talked. When there is agreement on assessment (given each individuals’ conation proﬁle preferences), the entrepreneur’s passion increases from having talked with that supporting community. We expect that his or her passion level will

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decrease if the entrepreneur is surrounded by a community that has a lower evaluation of the project than the entrepreneur, i.e., just as conﬁrmed understandings increase passion, contradictory ﬁndings by the entrepreneur decrease the entrepreneur’s passion. Alternatively, passion does impact the movement of an entrepreneur from one stage to the next. If an entrepreneur’s passion does not meet or exceed the inertia level, then the entrepreneur will remain as is for the next iteration (see explanation in inertia and opportunity). If the passion level exceeds the inertia level, then progression can be made to the next stage.

Entrepreneur-to-FollowerNetworking. There are two types of entrepreneurial discussion networks that an entrepreneur may utilize. One is an initiating network and is composed of up to eight individuals (Greve & Salaff, 2003). This network is used to conﬁrm the entrepreneur’s understanding of the skill sets required for an opportunity and to enhance the entrepreneur’s passion about the acknowledged opportunity. The second network is composed of up to 14 individuals (Greve & Salaff, 2003) and helps the entrepreneur to determine informally the general feasibility of the identiﬁed opportunity. This second network provides feedback on the suitability of the environment for the opportunity as the entrepreneur checks out the general environmental conditions. Again if there is congruence of understanding, the entrepreneur’s passion is increased. After sufﬁcient positive interactions with this second larger group, the entrepreneur will formalize his or her commitment to the opportunity and begin engaging in entrepreneurial event beyond entrepreneurial talk and internal thought experiments.

Group-to-Individual This refers to the impact of the group conation on the leader. The group level inﬂuences the entrepreneur because the entrepreneur has engaged these people in entrepreneurial discourse, which is inherently two-way. The group impacts the entrepreneur’s passion through two components: the pattern of conation present among those with whom the entrepreneur has spoken and their passion for the particular opportunity. The entrepreneur’s passion, then, is really socially constructed and socially constructed constructs are inherently idiosyncratic to the set of people involved (Sarason, et al., 2006; Black, et al., 2005). From our earlier model (see Fig. 1) the two group level inﬂuences are: entrepreneurial conation and opportunity passion.

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Conation. Recall that conation refers to the action category preference that an individual has when an individual is motivated to take action (Berry, 1996). Entrepreneurial conation has also been presented in the literature (Black & Farias, 2005). This form of conation is directly related to an individual’s preferences for dealing with ambiguity and uncertainty. Entrepreneurs inherently handle issues of uncertainty and ambiguity (Schindehutte, Morris, & Allen, 2006). However, it is suggested that individuals have preferences in dealing with ambiguity and uncertainty and treat these two constructs as independent (Black, 1998). Different skill sets are required to handle ambiguity (sensemaking skills – Hill & Levenhagen, 1995) versus handling uncertainty (problem-solving skills – Black & Farias, 2005). If an organizational leader surrounds himself with individuals who are relatively similar in their conation orientation (Black et al., 1997), this may be to enhance the probability of creating a dominant strategic logic (Fabian & Black, 2001). However, the result will be greater reinforcement for the entrepreneur’s perspective on action taking if larger numbers of the entrepreneurial team have similar conation preferences. If the entrepreneur and his or her entrepreneurial team are not close, then there will be no enhancing effect on the entrepreneur’s action choice or his or her likelihood of taking action. Thus, two components are needed for the conation preference inﬂuence: (1) the entrepreneur’s conation preference and (2) the pattern of the follower’s conation preferences. The more the follower’s are close to the entrepreneur, the more likely that the entrepreneur will take action based on his or her conation preference. If the followers are not close to the entrepreneur’s conation preference, then there will be no action-taking enhancement. Individual-to-Group Again that which emerges from the interactions of the individuals involved with the entrepreneurial team is the pattern of the follower’s entrepreneurial conation proﬁle preferences. While no one group level of conation is calculated, following the work of Lichtenstein et al. (2007) where patterns of activity in the larger system inﬂuence the individual, the pattern of conation preference has the potential to inﬂuence the entrepreneur. Thus, the conation preferences for the entrepreneur and each follower are needed. The gathering of these individual conation preferences from the followers is included in Fig. 2 in the box marked 4.1. Many of the inter-agent relationships in Fig. 2 are simple and straightforward; however, some relationships are not dependent on the presence of only the two agents but rather on a conﬁguration of agents and

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relationships or a pattern of relationships (Baron, 2006). There are also opportunities for feedback and recidivism continuing the support for using ABM as a methodology.

HYPOTHESES The theoretical relationships between the agents involved in the entrepreneurial action model (Fig. 2) developed earlier will enable the creation of an agent-based model. Because agent-based models create the social structures in place for a phenomena, they enable virtual or thought experiments. By grounding a model in the current literature the initial structure enables the test of veracity in a system perspective of constructs that may have previously been examined in isolation. For entrepreneurial action choices, the agent-based model enables the examination of action choice patterns from a dynamic social construction of opportunity and entrepreneur as called for by Sarason et al. (2006). Because of the grounding in entrepreneurial phase literature (Greve & Salaff, 2003; Long & McMullan, 1984; Wilken, 1979), the action choice patterns should be: Entrepreneurial Intent and Potential Opportunity Phase – internal entrepreneurial events; Nascent Entrepreneur and Acknowledged Opportunity Phase – entrepreneurial rhetoric; Nascent Entrepreneur and Identiﬁed Opportunity Phase – entrepreneurial rhetoric; Nascent Entrepreneur and Committed Opportunity Phase – entrepreneurial rhetoric and events (however, this last stage is not modeled here just the attainment of it is modeled here). There should also be variation in the length of each phase and in the number of opportunities being evaluated (McCarthy et al., 1990; Ucbasaran, Westhead, & Wright, 2008). We have two classes of hypotheses. The ﬁrst class demonstrates that the model works in anticipated ways. The second set examines the speciﬁc conditions that impact the timing of reaching the Nascent Entrepreneur and Committed Opportunity Phase. Each hypothesis is tested using the model described above and holding all inputs constant except the one being investigated.

Set 1: Model Conﬁrmation Hypotheses Action triggers include having sufﬁcient levels of business and technical skills. Due to individual differences and experiences, we expect some

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entrepreneurs to reach the action phase faster than others. Entrepreneurial literature that notes that entrepreneurs with higher levels of education (van der Sluis, van Praag, & van Witteloostuijn, 2004), and organizational experience (work experience, business ownership experience, managerial capability, and entrepreneurial capability; Shane, 2000; Smith et al., 2005) were more apt to identify opportunities. Most entrepreneurs have approximately 5 years experience in an industry before going into business (Greve & Salaff, 2003) with the associated accumulation of experiential learning in both skill areas (Smith et al., 2005; Lumpkin & Lichtenstein, 2005). Those entrepreneurs with technical skills were more likely to pursue opportunities in the market (Ucbasaran et al., 2008). Because the action trigger includes having a sufﬁcient level of both technical and business skills, we expect that entrepreneurs with high expertise levels in these skill areas will begin identifying and pursuing a potential opportunity sooner than entrepreneurs with low expertise. We call this set of skills the skill proﬁle. Beginning to evaluate a potential opportunity means that the potential opportunity has made the ﬁrst cut for this entrepreneur (it is now an acknowledged opportunity) and they are beginning to talk about it to determine its needed environmental conditions. Hypothesis 1. Holding all else in the model constant, on average, an entrepreneur with high skill proﬁle expertise levels will begin evaluating a potential opportunity in fewer simulation iterations than entrepreneurs with low skill proﬁle expertise levels. Besides skill levels, another characteristic that may move an entrepreneur into opportunity assessment early is the entrepreneur’s conation proﬁle. We expect that an entrepreneur who has high ambiguity tolerance and a high uncertainty tolerance will begin evaluating opportunities earlier than other conation proﬁles. We expect this because such an entrepreneur does not mind dealing with the uncertainty caused by having low skill levels needed for an opportunity (is willing to handle the uncertainty that goes with such an action) and is willing to take action when only a very few of the skills are known or possessed (does not mind deﬁning or discovering what else is needed is an example of having a high tolerance for ambiguity). Hypothesis 2. Holding all else in the model constant, on average an entrepreneur with high conation proﬁle levels (high tolerance for both ambiguity and uncertainty) will begin evaluating a potential opportunity in fewer simulation iterations than entrepreneurs with low conation proﬁle levels.

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Set 2: Determination of Qualities of Entrepreneurs that Affect the Time to Reaching Opportunity Commitment from Opportunity Identiﬁcation We deﬁne opportunity commitment as the point where the entrepreneur begins entrepreneurial events such as assembling a support team or actually moves to entrepreneurial events such as assembling resources, etc. (i.e., the entrepreneur moves to a more formal planning phase and may also begin gathering resources). Because there is a need for skill levels to be at a certain level before the move to event action taking, we expect that those entrepreneurs with low skills proﬁle will take the longest to reach opportunity identiﬁcation. This hypothesis thus looks at the length of iterations it takes to reach the end of the simulation rather than to begin active evaluation of an opportunity. Hypothesis 3. Holding all else in the model constant, an entrepreneur with low skills proﬁle expertise levels will reach opportunity commitment in more simulation iterations than entrepreneurs with high skills proﬁle expertise levels. However, because entrepreneurs with low levels in their conation proﬁle (are uncomfortable handling uncertainty and ambiguity) handled that comfort zone issue in the ﬁrst part of the simulation, the only issue left is assessing the actual environment and developing their passion for the opportunity. Because the entrepreneur’s perception of the environment may or may not match up with the actual environment, and entrepreneurs with low conation proﬁle levels will have tighter constraints on what is acceptable, we believe that the time involved in the second part of the simulation (from identifying an opportunity to becoming committed to it) will still take longer than those with high conation proﬁle levels. Hypothesis 4. Holding all else in the model constant, an entrepreneur with low conation proﬁle levels will reach opportunity commitment in more simulation iterations than entrepreneurs with high conation proﬁle levels. When considering the relative inﬂuence of skills and conation proﬁles, it is also important to consider that some combinations of these two may be more efﬁcient in reaching opportunity commitment than others. Assuming the earlier hypotheses are supported, we would expect that entrepreneurs with high skills proﬁle and high conation proﬁles would reach opportunity commitment before all other combinations.

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Hypothesis 5a. Holding all else in the model constant, on average an entrepreneur with high conation proﬁle levels, high technical skills, and high business skills will reach opportunity commitment in fewer simulation iterations than entrepreneurs with high conation proﬁle levels, low technical skill expertise levels, and low business skill expertise levels. Hypothesis 5b. Holding all else in the model constant, on average an entrepreneur with high conation proﬁle levels, high technical skills, and high business skills will reach opportunity commitment in fewer simulation iterations than entrepreneurs with low conation proﬁle levels, high technical skill expertise levels, and high business skill expertise levels. Hypothesis 5c. Holding all else in the model constant, on average an entrepreneur with high conation proﬁle levels, high technical skills, and high business skills will reach opportunity commitment in fewer simulation iterations than entrepreneurs with low conation proﬁle levels, low technical skill expertise levels, and low business skill expertise levels.

Running the Simulation The model presented here was coded into an agent-based simulation using Repast Simphony, an agent-based simulation development package created by Argonne National Labs. Simphony was developed from SWARM, an early simulation packaged developed by the Santa Fe Institute. The structural model deﬁned the agents and the relationships between them. The structural model followed the description given earlier and remained the same for all experimental conditions. Input This program allows for the speciﬁc designation of values for agents or, once deﬁned, values can be randomly assigned. Input values are all synthetically generated. The Environment. For this paper, values for the PESTEL environment were designated as being slightly below a mid-level for all constructs. Given the coding for the comparisons, this means that the PESTEL environment was favorable for all opportunities that had values higher than those found in the general environment. Thus this environment was fairly ‘‘good.’’ However, the conation proﬁle associated with the environment was

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randomly assigned. The conation proﬁle indicates the levels of ambiguity and uncertainty present in the external environment. There is only one external PESTEL environment. The Opportunity. For this paper, the categories composing the opportunities were deﬁned but values were randomly assigned and the opportunities were randomly placed in the grid representing our marketplace. This allowed for a wide range of opportunities to be present since this meant that required technical skill expertise levels varied, needed business skill expertise levels varied, and the ideal PESTEL environment for the opportunity varied. The conation proﬁles associated with each opportunity was determined by its placement on the 50 50 grid, indicating the levels of ambiguity and uncertainty present in the opportunity. Multiple entrepreneurs could pursue and evaluate an opportunity at the same time. The Entrepreneur. The technical skills, business skills, perception of the PESTEL environment, and conation proﬁle were all randomly assigned within a low range (1–3) or a high range (5–7) as required by the hypothesis under investigation. The conation proﬁle indicates the personal tolerance for ambiguity and uncertainty was similarly set within a low range or high range as required by the hypothesis under investigation. The 20 entrepreneurs are placed randomly. Follower. The technical skills, business skills, perception of the PESTEL environment and conation proﬁle were initialized similar to the entrepreneur’s initialization described above. There were 80 followers initially placed randomly on the grid. Run Structure For this paper, each run had 500 iterations. Given the large amount of stochastic components, each experimental condition was run once. The values across entrepreneurs were averaged together. When an entrepreneur reached opportunity commitment, the entrepreneur remained at that state. For the earlier states, the entrepreneurs evaluated current conditions, stay, move on, recidivate, or move to begin the investigation of a new opportunity. Output For this paper, we used two forms of output. One graph showed the average state of the entrepreneurs at each iteration. Because some entrepreneurs were not in favorable areas for their skill sets and identiﬁed environmental

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conditions, they would move to new areas and begin their process all over again. At no time did all of the entrepreneurs reach opportunity commitment. Thus, we also have a second graph that indicates at each iteration the percentages of agents who were at each state.

RESULTS Descriptive Statistics In this simulation, the input data (descriptive data) were synthetic data created to meet the general boundaries speciﬁed in each virtual experimental condition and can be found in Table 1. It is important to remember that while the model was held constant, several variables were deﬁned to be randomly generated. Thus, there were 2,500 potential opportunities for each of the seven hypotheses or experimental conditions. Each experimental condition had a new randomly set of 2,500 potential opportunities, which resulted in a total of 22,500 potential opportunities, whereby only 885 were acknowledged (3.93%) by an entrepreneur. There were 120 potential opportunities/entrepreneur and on average 7.37 acknowledged opportunities/entrepreneur (remember that means that they initiated looking closer at them). Of the 885 acknowledged opportunities, 51% or 92 made it to the next stage of being identiﬁed as opportunities and talked about by the entrepreneur. Talking about these opportunities resulted in a 50% drop rate. Of those entrepreneurs who identiﬁed opportunities, 56 ended up committing to the opportunity which was the end of our simulation, or approximately 71% of the opportunities identiﬁed made the ﬁnal cut after further talking and a closer look at the external environment. Overall, less than 25% of the 1% of the full set of potential opportunities or 6% of the acknowledged opportunities were committed to by entrepreneurs. On average 58% of the entrepreneurs were actively looking for opportunities, 8% were in the process of acknowledging them, 12% were clarifying their understanding and identifying them, and 22% were committing to them.

Experimental Results For Hypothesis 1, we examine (see Fig. 3) the output graph and look for the line representing the average state of the entrepreneurs across all runs for

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Fig. 3.

Hypothesis 1 Results.

high skills to be above the line for low skills. Because not all entrepreneurs ever ﬁnd an opportunity to pursue, the highest average line graph never reaches above a 2. The jagged nature of the graph indicates the movement of the entrepreneurs back to earlier states. In Fig. 3, we see by the top label that we are looking at a comparison on skill levels. The two groups, high and low, are indicated by solid or dashed lines respectively. The entrepreneurial states are: Entrepreneurial Intent; Opportunity Acknowledgement; Opportunity Identiﬁcation; Opportunity Commitment. For Hypothesis 2, we examine (see Fig. 4) the output graph and look for the line representing the average state of all entrepreneurs with a high conation proﬁle to above the line for those with a low conation proﬁle. The same caveats mentioned for Hypothesis 1 apply here as well. Fig. 4 has much the same organization as Fig. 3; however, the top label now indicates that we are comparing conation preferences. For Hypotheses 3 and 4, we ﬁrst ran the simulation with the indicated experimental conditions. We then tracked iterations and determined when an entrepreneur reached the state of opportunity commitment. These

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Fig. 4.

225

Hypothesis 2 Results.

iteration values were averaged to determine when each category of entrepreneur reached organizational commitment. Those results along with the percent of entrepreneurs who reached organization commitment within 500 iterations are presented in Table 1. We will use Table 1 to examine Hypotheses 3 and 4. Because there were a variety of entrepreneurs who reached organizational commitments at various iterations, we needed to use the average opportunity commitment emergence value. From Table 2, we can see that Hypothesis 3 is supported (61o298) and that Hypothesis 4 is supported (82o135). The last set of hypotheses helps us examine which inﬂuence (skills or conation) is more dominant. We began by following the same procedures as in Hypotheses 3 and 4. However, there was not enough variation in one condition. Instead, we plotted when each condition had entrepreneurs reach that third state of opportunity commitment. We then placed all line graphs onto the same summary graph (see Fig. 5), which enable us to get a comprehensive picture of the effectiveness and efﬁciency of each experimental condition. Recall that we have 20 entrepreneurs in each condition for a total of 80 entrepreneurs. Of these 80 entrepreneurs in these runs, 10 entrepreneurs

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Table 2. Category of Entrepreneur (20 Entrepreneurs/ Condition)

Result on Iterations to Reach Opportunity Commitment. Percent Reaching No. of IteraOpportunity tions to First Commitment Opportunity Commitment

H3: Random Conation Proﬁle; High Skill Proﬁle H3: Random Conation Proﬁle; Low Skill Proﬁle H4: Random Skill Proﬁle; High Conation Proﬁle H4: Random Skill Proﬁle; Low Conation Proﬁle

Fig. 5.

No. of Iterations to Last Opportunity Commitment

Average Iterations to Opportunity Commitment

40

28

230

61

25

31

478

298

25

26

218

82

40

26

483

135

Growth Paths of Opportunity Commitment by Interaction Conditions.

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from the high conation proﬁle, high technical and high business skills reach opportunity commitment. Four entrepreneurs from the high conation proﬁle, low technical and low business skills reached it. Thirteen from the low conation proﬁle and high skills proﬁle reached it. Finally only one from the low conation proﬁle and low skills proﬁle reached it. When we examine in the graph for Hypothesis 5a, we need to have the high conation proﬁle| high skills proﬁle (fat black line) start sooner and be above the high conation proﬁle| low skills proﬁle (fat gray line). The two lines are so close when they move to opportunity commitment and are intertwined throughout the simulation and ran equivalent with the same amount of entrepreneurs who committed to an opportunity. This hypothesis is rejected. For Hypothesis 5b, the high conation proﬁle| high skills proﬁle (fat black line) should start sooner and be above the low conation proﬁle| high skills proﬁle (thin black line). This is not the case. The opposite is true. The low conation proﬁle| high skills proﬁle starts sooner and is higher than the high conation proﬁle| high skills proﬁle. Again, the hypothesis is rejected. For Hypothesis 5c, the high conation proﬁle| high skills proﬁle (fat black line) should start sooner and be above the low conation proﬁle| low skills proﬁle (thin gray line). Hypothesis 5c is not rejected.

Summary Our basic conﬁrmation hypotheses were both conﬁrmed. When there is random conation, high skill levels make a great difference and when skill levels are random, high conation proﬁles make a small difference. We also conﬁrmed that both of these same conditions result in entrepreneurs reaching the stage of opportunity commitment faster than the related but opposite condition. However, when we began to look at other specialized groupings namely the interaction sets, our hypotheses were mostly rejected. The high conation proﬁle| high skills proﬁle is not necessarily the most effective or efﬁcient way to reach opportunity commitment. The low conation proﬁle| high skills proﬁle is more effective and efﬁcient and the high conation proﬁle| low skills proﬁle is at least as effective and efﬁcient for reaching opportunity commitment. Perhaps of equal interest are the general statistics and demographics about this simulation effort. Of the 180 different entrepreneurs (20 per experimental condition), 58% even at the end of 500 iterations were still looking for an opportunity to pursue. Of the other 42%, 8% were checking

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out an opportunity (Opportunity Acknowledgement), 12% had been talking it up with a wider circle of people and informally checking it out (Opportunity Identiﬁcation), and 22% had made a commitment to move to more formal planning processes (Opportunity Commitment). Remember that this simulation did not move past the public commitment to begin to formally ally with others in the acquisition or borrowing of resources.

DISCUSSION The general input and output demographics of this pre-commitment simulation, allow us to study several issues at once; entrepreneurs interacting with their environment, possible opportunities, and discussion networks as they seek out, evaluate, extend their knowledge about and make public commitments to opportunities. Initially, the output illustrates how time consuming the preliminary stages of an entrepreneurial process are even when the opportunity is already ‘‘out there’’ and waiting to be discovered and is somewhat related to the entrepreneur’s own technical skills (i.e., the simulation only used three technical skills which all entrepreneurs and opportunities had). Secondly, only a small fraction of opportunities are examined when opportunities and entrepreneurs are spatially bound (Andersson, 2005). Even when an opportunity has been acknowledged, only 6.33% are committed to by an entrepreneur. However, if the opportunity gets to the informal ‘‘chat’’ test (Opportunity Identiﬁcation), then there is a 70% chance that the entrepreneur will commit to it. From the hypotheses we ﬁnd that certain entrepreneurial backgrounds and preferences do make a difference in the overall effectiveness and efﬁciency of reaching opportunity commitment. Primarily, if an entrepreneur has a high skill proﬁle and a low conation proﬁle, that individual is more likely to ﬁnd an opportunity to commit to than if the entrepreneur has a high conation proﬁle and a low skills proﬁle. In fact, the only condition where ﬁnding an opportunity to commit to might be considered luck or serendipity is if you have low expertise levels in your skill proﬁles and a low conation proﬁle. Next, we conﬁrmed that the steps in becoming an entrepreneur are narrow and even when you are prepared, only very few individuals actually ﬁnd an opportunity to which to commit, much less get to the point of actually opening or acquiring a business. This simulation is not intended to be a predictor, as the environment was fairly muniﬁcent, the input data was synthetically generated to allow our

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experimental conditions to have equal membership, there were three technical skills that were not delineated, so the results are not as generalizable as a random survey but rather of an investigative nature. The simulation would beneﬁt from the inclusion of more dynamics. It would be insightful, if the entrepreneurs learned more than ‘‘This opportunity would not work for me’’ and actually improved speciﬁc entrepreneurial skills. Furthermore, it would be beneﬁcial to use more deﬁned measures for passion, inertia, and discussion group inﬂuences. Given these limitations, however, the basic model allows the entrepreneur to interact with followers and make decisions based on those interactions. The model further demonstrates the socially constructed nature of the environment and understanding of potential opportunities. The model also begins to explain, how a base opportunity deﬁned by the exogenous workings of the larger system (i.e., outside of this model) matter. Entrepreneurs’ skills, conation proﬁles, location in the opportunity space, and entrepreneurial talk matters, especially when placed into a dynamic system. Skill sets (from the supported hypotheses) and to whom one talks (from the amount of recidivism after talking with others – 90% drop back from Opportunity Acknowledgement and 52% from Opportunity Identiﬁcation) seems to matter the most for this model. It is interesting to note that the combination of having both high tolerances in the conation proﬁle and having high expertise in the skill proﬁle does not provide an advantage in reaching a commitment to take action. High in either one does, but not in both! This may mean that skill sets and conation orientations have a compensatory cogency relationship as posited by Black and Boal (1997) as one of the relationship dimensions of importance in the development of strategic resources. Thus, more of one may offset less of another but not replace it. The use of agent-based simulations to examine entrepreneurial action choice processes provides understanding of social construction of the entrepreneur, his or her environment, and opportunity identiﬁcation. The model can be expanded to include the actual opportunity identiﬁcation processes proposed by Ardichvili et al. (2003). The model can further be expanded to include the Context-For-Learning (Black & Oliver, 2005) development of the individuals involved in the entrepreneurial team and the actual recruitment of entrepreneurial team members. Such a fuller and more complex model may help to improve our understanding of the interrelated nature of the social construct of economically important resources, as well as, the development of entrepreneurs.

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SELF-ORGANIZATION OF COMPETENCY DEVELOPMENT AND THE ROLE OF MANAGERS Martin Kro¨ll ABSTRACT The understanding of competency development has changed to learning toward a higher degree of self-organization of the learning process. This shift leads to increased requirements on the communication processes of employees and superiors. It is postulated that the coordination between self-organization and external organization is deﬁcient, so competency development activities often do not lead to the desired outcomes. An empirical study was undertaken in which a total of 106 companies were involved. The study investigated various expectations surrounding selforganization and external organization in large companies as opposed to SME, together with the conditions under which self-organization and external organization occur in these companies. The empirical study comes to the conclusion that large enterprises emphasize the central role of HR development for the innovation capacity of an organization more than SME. There are also different ways of combination of self- and external organization of competency development depending on the enterprise size. In contrast to the given assumption, it could not be identiﬁed that managers as HR developers can improve the success of competency development. Enhancing Competences for Competitive Advantage Advances in Applied Business Strategy, Volume 12, 235–261 Copyright r 2010 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0749-6826/doi:10.1108/S0749-6826(2010)0000012012

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1. RESEARCH QUESTION Approaches to sustainable learning cultures containing a shift from an emphasis of the view from teaching to learning toward a trend selforganized, respectively self-dependent control of the learning process (Arnold & Lermen 2004, p. 71) are a focal point of the current scientiﬁc debate within the competency development research.1 This is motivated by various factors. Work-integrated learning and work-centered learning are considered increasingly important for the promotion of quality and innovation management in companies, in comparison to other forms of learning. The appropriate learning culture is necessary in order for the learning to succeed (Sonntag & Stegmaier, 2007). Approaches on organizations as learning entities, which seek to link competency development on the individual level and competence development at the organizational level, also accord fundamental signiﬁcance to the requisite construction of the learning culture (Marsick & Watkins, 2003). Self-organization (e.g., self-learning ability, Arnold & Lermen, 2004, p. 9) plays a key role in the conﬁguration of competency development in this discussion, particularly when dealing with the transformation of learning cultures. In this context, however, the author holds the opinion that the debate should focus more pointedly on the interaction of self- and external organization, as well as the associated allocation of roles among the affected participants that is signiﬁcantly inﬂuenced by the learning culture. This paper postulates the thesis that reciprocal adjustment between self-organization and external organization and their connection with the different phases of competency development (demand analysis, preparation, realization, transfer, and evaluation) offers enormous potential for improvement. Furthermore, these aspects constitute the main reasons for the identiﬁcation of failed competency development, which is competency development that did not breed what it was planned for. The central question asks if there is a divergence between the proportion of external organization and selforganization in competency development depending on the organization’s size and what the main consequences are. The underlying assumption of this paper is that the coordination between self-organization and external organization is deﬁcient and that this is the main reason why competency development activities do not lead to the desired outcomes. The investigation does not claim to address the question exhaustively. Instead, the focus is on the differences in learning culture in relation to the size of an enterprise. The various expectations surrounding self-organization and external organization in large companies as opposed

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to small- and medium-sized enterprises (SMEs) are considered, together with the conditions under which self-organization and external organization occur in these companies.

2. THEORETICAL APPROACHES AS A FRAMEWORK OF REFERENCE The scientiﬁc debate will draw on recent scientiﬁc ﬁndings from the learning culture research (Seufert & Euler, 2008; Friebe, 2005). Theoretical approaches examine questions such as the characteristics of learning cultures and the extent to which they inﬂuence job-related competency development, as well as the relationship between corporate cultures and learning cultures in addition to opportunities and constraints in the conﬁguration of these two aspects. It is unanimously agreed in the research on learning cultures that, despite the increasing importance of selforganization, or indeed even due to it, the responsibility of executive managers is of growing and irreplaceable relevance. Next to the clariﬁcation of perceived roles among executives and employees, signiﬁcant considerations include the methods and instruments that enable dialogue and agreement between the participants. A broad theoretical foundation underpins the research hypotheses and their subsequent implementation. In addition to publications on learning culture, perspectives from the following ﬁelds of research are considered: New type of workforce (workforce entrepreneur, entrepreneurial employee) (Pongratz & VoX, 2003; Wunderer, 2003), new deﬁnition of the role of executives (Kleinau, 2005; Wunderer, 2003), work-oriented learning (Sonntag & Stegmaier, 2007), self-organization of competency development (Erpenbeck & Rosenstiel, 2003; Diekmann, Dittrich, & Lehmann, 2006), resource-oriented concepts of human resource management (Ridder & Conrad, 2004; Freiling, Gersch, Goeke, & Ch, 2006), dynamic capability approach (Winter, 2003, 2005; Zollo & Winter, 2002; Dosi, Nelson, & Winter, 2002), organizational learning (Watkins & Marsick, 2003), and organizational culture (Landau, 2003; Sackmann, 2002). Self-organization of competency development gains importance within competency development research. One main reason is that the employees are engaged to act and think more and more in an entrepreneurial way (Wunderer, 2003). From the company’s perspective, it gets more and more complicated to appreciate the economical development in situ and to assess the demands of competency concretely.

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Regarding competency development self-organization (according to Heyse, 2003, p. 577) means that the participants concerned should determine competency development’s aims, direction, instruments for establishment, schedule, transfer of acquired competencies, as well as the criteria that evaluate the outcome. On the other hand, external organization concerns stakeholders who will not acquire competencies by themselves. External organization’s participants could be executives, members of the human resources (HR) department, or the organization’s management as well as colleagues, vendors, customers of the organization, or off-the-job training providers. Self-organization occurs – as a matter of course – in the working tasks, context, and environment as well as the depending development of the organization. The research in learning culture points out that executives have a more and more growing, non-substitutable role in spite of, respectively even since, self-organization gaining remarkable importance (Arnold & Schu¨Xler, 1998). In addition to the understanding of the executives’ roles, the organizational members’ methods and instruments, which offer dialogue and adjustment between the members play an important role for competency development. Competencies are interpreted as the ability to act in the sense of Ko¨nnenhaben (skill assets) – according to Ortmann (2010). Ko¨nnenhaben is always connected with the human or organizational body. One has to divide the competencies of the individual participants (Erpenbeck & Rosenstiel, 2003; Heyse, 2003) from the competences of the collective participants (i.e., competences of the organization; Teece, Pisano, & Shuen, 1997; Dosi et al., 2002; Zollo & Winter, 2002). The assumption that individual competencies are congruent with the collective competences is negated explicitly. The organization’s competences have their own superior quality in comparison to the individual ones. The proportion of organizational assets and individual assets is structured hierarchically (Ortmann, 2010, p. 20) since the complete competences of an organization includes factors that cannot be found on individuals’ levels. Hence competency development instruments should make clear ﬁrst on which level should be implemented and how it makes an impact on external- and self-organizational processes. Resources cause the heterogeneity of the organization and should make it more competitive (Barney, 2001). Accordingly, competency development instruments should emphasize the development of competencies (Schroeder, Bates, & Junttilla, 2002; Hatch & Dyer, 2004), which are not easy to copy or imitate. Last but not least, they have to be synchronized to the organization’s needs speciﬁcally (Barney, 2001; Teece et al., 1997). Activities of competency

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development are not only an investment in the organization’s HR, but also support the value-added process of the organization and the competitiveness. Nevertheless, it means more than having resources unique, imitable, and useful to survive at the market. The fashion of resources’ usage is crucial. It is something like an art to handle and use resources in a creative and innovative way. It needs – beneath development and distribution – leverage of resources as well as diffusion, integration, and renewal of resources (Doz, 1996; Ortmann, 2010). Here it is interesting to consider the proportions of external and self-organization in the different processes. It seems likely that the possibility of development and usage of existing resources is depending on the organization’s competences. In order to enable learning at different levels, especially higher levels (beneath single-loop learning, double-loop learning, and deuteron-loop learning), there has to be a dynamic capability ‘‘y a learned and stabile pattern of collective activity through which the organization systematically generates and modiﬁes its operating routines in pursuit of improved effectiveness’’ (Zollo & Winter, 2002). Another passage says: Capabilities ‘‘y combine knowledge, particularly in the form of individual skills and organizational routines, with the sorts of inputs recognized in the economic theory of production.’’ Here Zollo & Winter (2002, p. 40) interprets organizational routines as multi-person skills. Schroeder et al. (2002) postulate that internal learning (e.g., training to perform multiple tasks, useful suggestions are implemented) and external learning (e.g., it is under examination, to what extent customers and vendors can take part in these processes) result in unique processes and equipment and result in a higher performance of the organization (as measured by quality, time, and costs). Hatch and Dyer (2004) supplied evidence that a special organization and control concerning employee selection, HR development, and deployment lead to a signiﬁcant improvement of learning processes (especially regarding learning-by-doing) as well as their velocity. Furthermore, it has a positive impact on the organization’s performance. That is how organizations can procure competitive advantages. The following paragraph is closely linked to remaining questions of Hatch and Dyer (2004), for example, what kind of impact on learning of organizations respectively the deﬁnition of competency development activities and the social complexity of work have. The focus of the current study is, how learning (internal as well as external learning in the sense of Hatch & Dyer, 2004) can be organized by the organizational members. In addition to Hatch and Dyer (2004), it should become clear, what kind of processes go on inside the organization. Especially, the relationship

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between the line managers and the organizational members who want to develop and use their competencies are focused. The knowledge which says that, for example, the acquired competencies’ transfer is often a key problem as to the organizational deﬁnition of competency development activities is regarded. If the line manager should not permit the competencies’ usage and if he did not offer scope of action for doing so, learning would not have any inﬂuence on the organization’s development. Taking as a starting point the dimensions of the learning culture inventory (LCI), as sketched out notably by Sonntag, Kh., Schaper, and Friebe (2005), this study focuses on the following ﬁve speciﬁc aspects of learning culture: 1. structural and formal frame conditions for learning in the company (e.g., the structure of organizations, remuneration and incentive systems, as well as working time regulations); 2. strategic human resource development (hereafter ‘‘HRD’’; needs assessment, planning, realization, and evaluation, as well as the securing of transfer of HRD measures); 3. formalization of competency development of employees; 4. learning atmosphere and encouragement by colleagues; and 5. learning-oriented managerial functions. With reference to the dimensions of the LCI, Friebe (2005) concludes in her empirical study that skill-building tasks, a learning-oriented leadership style, and external learning contacts positively inﬂuence job-related competency development, as perceived by the staff interviewed. Of less inﬂuence are the normative frame conditions of a learning-oriented corporate philosophy (e.g., how learning is embedded in the corporate mission statement), strategic HRD, and a strong learning environment. At the same time in the professional literature, the executives are required to act as leaders of HRD for their personnel (Tichy & Cardwell, 2004; Meifert, 2006). These results and considerations are regarded as a starting point in considering the relationship between executives and members of the organization, and its inﬂuence on competency development. Approaches on decentralized HRD, which pronouncedly assign the roles of HRD leaders to executives, are of particular interest. This new perception of roles also suggests consequences for the allocation of tasks among the members of human resource departments. In the context of another empirical study (Kro¨ll & Gaffron, 2009), it was found that particularly organizations with few innovations expect managers to take the role of human resource managers. Organizations with more innovations do not show this pattern of results. How can we account for

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these ﬁndings? Organizations with many innovations often have ﬂat hierarchies (Witt & Witt, 2008). Managers are part of this hierarchy and should not change their position in this organizational structure by gaining new qualiﬁcations because this would degrade the ﬂat organizational hierarchy. For this reason, innovative organizations do not expect their managers to become human resource managers. Furthermore, it could be proved that innovative organizations do not choice some special form of verifying the efﬁciency of their human resource activities mostly (e.g., by means of beneﬁt–costs analysis), which would be part of external organization of competency development. In this regard, it is important to ask if there are different interrelations between self- and external organization (e.g., low self-organization and high external organization or vice versa) and which of this form is potentially more promising with regard to competitive advantages by means of development of competences. The distinction between SMEs and large companies was regarded as useful in this study because there are many differences between human resource management and human resource development in SMEs and large companies (Mugler, 2008). Another reason for an examination of the interrelation of self- and external organization is the ﬁnding that lacking acceptance of human resource activities by involved members of the organization is a central challenge for supervisors. Why should an organization offer human resource activities to its employees if they neither take an active part nor use these activities for their selforganization of their development of competences? In the following text, the hypotheses of the study, which are based on the theoretical ﬁndings, are explained. A particular learning culture should be bound to an improvement of the innovative capacity of organizations. Maria and Watkins (2003) emphasize that, ‘‘the promise of continuous learning is innovation.’’ In the ﬁeld of research on innovation management handling and accomplishment of resistance against innovations is an important point. For this reason, it is inevitable that the company management attaches great importance to HRD compared to other activities in personnel management (Bergmann & Pohlandt, 2006). Hence the question arises if organizations attach different importance to HRD subject to their size of enterprise. Based on the assumption that large companies have a higher degree of professionalization results the following hypothesis: Hypothesis 1. Large companies attach more importance to HRD for the innovative capacity of their organization.

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Sonntag et al. (2005, S. 194ff.) emphasize the characteristics of learning cultures of SMEs. There are various qualitative differences between SMEs and large companies. For instance, in most cases the company management of SMEs is also the owner of the organization. Therefore, decisions are often made by the management and the employees do not have large latitudes. Furthermore, most decisions concerning HRD are made by the management without an agreement of the organizational members. The supervisors mostly decide which human resource activities are organized and who is allowed to take part in these activities. Hypothesis 2. Large companies expect a higher degree of self-organization and competency development of their members than SME. It is postulated that employees should be entrepreneurial. According to the concept of the ‘‘Arbeitskraftunternehmer’’ (i.e., the entrepreneur of one’s own labor power) by Pongratz and VoX (2003), employees are increasingly confronted with the demand for self-control, self-economization, and self-rationalization. Moreover, self-organization and self-regulation become more important for an effective competency development (Derichs-Kunstmann, Faulstich, Wittpoth, & Tippelt, 1998). Approaches, which emphasize the role of self-organization for competency development, point out that this is the best way to achieve an enduring learning culture (see Friedrich & Mandl, 1997). Hypothesis 3. The more pronounced the demand for self-organization, the more likely the competency development leads to the desired result. Industrial psychologists emphasize that the understanding of the functions of human resource management differ from SMEs to large companies (Mugler, 2008). In large companies, managers have greater responsibilities regarding competency development as Sonntag et al. (2005, S. 144) state. One reason for this difference may be the fact that large companies recognized the negative consequences of centralization of HRD. Furthermore, the department for human resource management often does not take part in the everyday life of large companies and accordingly they are not involved in the requirements of the employees. Hypothesis 4. The larger the company, the sooner the executives are expected to take on the role of a mentor. Theoretical concepts emphasize the manager’s role as to competency development, especially during the phase of transfer (Rouillier & Goldstein, 1993; Tracey, Tannenbaum, & Kavanagh, 1995). Efforts toward competency

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development that blind out the manager’s role run the risk of failure, respectively, the risk of an undesired result of competency development. Hypothesis 5. The more pronounced the expectation, that executives take on the role of a mentor, the more likely the competency development leads to the desired result. Large companies analyze the demand of training more systematically and evaluate the success of training more often-so the results of an empirical survey (Kabst & Giardini, 2009, p. 36). The development of competencies in SME employees in contrast is more reactive (Gonon & Stolz, 2004, p. 10). The relationship in SME between managers and employees is different. The concrete relationship inﬂuences self- and external organization crucially. Hypothesis 6. Both in SME and large-scale enterprises, there are preferred combinations of self- and external organization. If managers are not regarded to see themselves as an HR developer whereas the employees are confronted with high expectations toward selforganization as to competency development at the same time, then it is less likely that competency development leads to the desired result. Does this mean vice versa, that high external organization (managers see themselves as an HR developer) and low self-organization leads to a desired result of competency development? Hypothesis 7. Depending on the certain combinations of self- and external organization, the results of competency development may differ.

3. METHODOLOGICAL STEPS An empirical study was undertaken in which a total of 284 companies were approached by way of personal contact, from which 106 half-standardized questionnaires were evaluated. In terms of business size, the sample was composed as follows: 30.3% of the participant enterprises employed 50–249 staff, 23.9% employed 250–999 staff, and 47.7% employed 1,000 or more staff. In terms of business sectors, the largest group of participating companies (47.7%) were located in industrial production, particularly the metal and electronics industry, and 30.3% in the service sector, in particular, retail. The other ﬁrms belonged to several different sectors. Non-proﬁt organizations were not represented. The present sample is explorative and deals with companies in NRW with at least 50 employees. By the exclusion

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of crafts enterprises and an alignment with the latest ﬁndings of the BDI middle-class panel (Bundesverband der deutschen Industrie, 2009) and the IAG enterprise panel (Bellmann & Gewiese, 2002), it can be assumed that the sample can point to certain tendencies. Both panels analyze companies of different segments and sizes yearly concerning a lot of HR policy instruments and claim to draw a high representative sample. As in other surveys on corporate learning cultures (e.g., Sonntag et al., 2005; Seufert & Euler, 2008), those responsible for matters of HRD were interviewed, for example, heads of HR departments or HRD departments, or board members. The half-standardized questionnaires were evaluated via quantitative statistics tests (Chi-squared (w2) tests, analysis of correlation (Spearman’s Rho (r)), regression models and one-way-analyses of variances (ANOVA)), which revealed signiﬁcant differences between the learning cultures in SME and large ﬁrms. In order to examine the sizes of the effects observed, different methods were used in assessing the effect size of the differences (Cramer’s V, eta-square (Z2), correlation coefﬁcients (r) can be regarded as an effect size by themselves). Prior to the survey, a pre-test was carried out on 15 companies. The participants’ understanding of the questions was checked, ensuring that all relevant points of the research material were addressed. In an additional interview the validity of the questionnaire in terms of content and structure was evaluated with the help of selected experts, and a reliability check was undertaken. The items related to innovation management in the perspective of external and internal organization are clariﬁed below.

3.1. Items Concerning Management of Innovation In examining the role of HRD from the perspective of innovation management, the degree of innovation management was measured against the following factors: The share of product, process, and input changes in the previous ﬁve years, whether the innovative behavior of the company was satisfactory, distinctive, or extreme, and the extent to which the focus on innovation could be increased.

3.2. Items Concerning Self-Organization In addition to the choice of measures for HRD against the company’s size, which inﬂuences the opportunities and constraints of external organization

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and self-organization, the empirical research also analyzed the direct relationship between external and self-organization. Here it was examined to what extent HRD experts expected their staff to organize their competency development independently (Diekmann et al., 2006). Referring to the theoretical approach by London/Smither on career-related continuous learning following points were considered important with regard to selforganization of competency development: Requirement assessment, preparation and realization of competency development, securing of transfer, and evaluation of competency development (Sonntag & Stegmaier, 2007, S. 45ff.). The self-organization index was measured by means of the following factors: Employees must assess their own competencies and competency potentials. Every member of the organization decides largely autonomously about his or her development of competencies. In addition to the competency development arrangements on offer, employees can independently select activities for competency development, which will also be supported by the company. Every member of the organization decides, largely autonomously, on their own competency development and the deployment of their newly acquired skills. Employees are responsible for their capability of applying their newly acquired skills. The employees themselves are accountable if their competency development does not lead to the desired results (e.g., loss of free time or working time, not achieving career goals).

3.3. Items Concerning External Organization Beside self-organization during competency development the present study identiﬁed the degree of external organization. In this context, it was examined to what extent managers are expected to take on the role of a coach or leader of HRD, and whether differences occur in relation to company size. Questions particularly aimed at ascertaining whether managers performing such a role as HRD leader were evaluated and supported. Such proceeding aims at a structural understanding of managerial behavior and not primarily at an interactive one

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(Wunderer, 2003). To quantify this dimension, the following factors were considered: Managers are involved in preparing the instruments of HRD. All managers monitor whether members of the organization are undertaking competency development. Managers verify the utility of the employees’ competency development. When managers are appraised, it is taken into account whether they systematically support their subordinates’ HRD. Managers deploy instruments of HRD with the aid of ‘‘training units.’’

4. RESULTS Section 4.1 discusses the analysis of differences concerning the organizations’ sizes regarding management of innovation, objectives, and instrument of HR development. In Section 4.2, external and self-organization are analyzed, as well as their combination. In Section 4.3 inﬂuencing factors and requirements of successful competency development are explored. 4.1. Differences between SME and Large Enterprises Regarding innovative behavior, 80% of large companies value HRD highly, compared to only 51.5% of SME (r ¼ 0.237, po0.014). In contrast, SME regard personnel selection as particularly important in respect of innovation management (r ¼ 0.168þ, po0.088): 60.6% of the scrutinized SME assign high value to personnel selection, which is the case in only 44% of large companies. The correlation between these two aspects and the size of the companies prove to be signiﬁcant. The special emphasis on recruitment in SME is striking (see Table 1) (r ¼ 0.200, po0.038). While large companies depend on HRD and the support of their employees for this, SME aim to achieve innovation through the recruitment and selection of new recruits. Thus large companies’ human resource activities are focused on innovation in the internal market and SME’s personnel activities on innovation in the external labor market. SME prefer to buy the competencies required for innovation while large companies strive to build up the required competencies internally. Since the internally built-up competencies are more complicated to copy or imitate it seems likely that competencies in large enterprises offer them more competitive

54.5

24.0

34.0

6.1

12.0

6.0

34.0

12.0

24.2

44.0

68.0

60.6

Personnel Selection (%)

50.0

40.0

51.5

36.0

24.0

18.2

10.0

28.0

18.2

80.0

84.0

51.5

6.0

0.0

6.1

Personnel Appraisal Remuneration Human Redundancy Deployment (%) (%) Resource (%) (%) Development,a (%)

Question: Which of the above are the three most important personnel management activities from the perspective of your company’s innovation management? (a ¼ 0.05; a ¼ 0.01). a 2 wð12Þ ¼ 13:359 , po0.038.

Under 250 employees 250–999 employees 1,000þ employees

Recruitment Personnel (%) Planning (%)

Innovation Management and the Role of Personnel Management-Related Instruments.

Personnel Advertising (%)

Table 1.

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advantages, provided that competencies products or services, which are created by using this competencies, are regarded as valuable in the customer’s eyes. In light of the interaction between external organization and self-organization of competency development, this result signiﬁes that, if large companies regard HRD as a task more worthy of promoting than do SME, they are also more likely to provide personnel, temporal, and ﬁnancial resources for external organization of HRD. As competency development does not lead to its desired result in 60% of cases, independent of company size, the question arises which goals are pursued by HRD and whether they vary with company size. Due to the speciﬁcs of the interrogation of experts, the ﬁndings captured in this empirical study relate only to external organization. Clearly the objectives pursued by staff through competency development may not match those of external organization, and should be considered in a further debate. The differentiation of the various goals of HRD draws on the taxonomy of competencies by Erpenbeck and Rosenstiel (2003). From the perspective of the promotion of companies’ innovative performance, great signiﬁcance is ascribed to the scanned goals (Bergmann & Pohlandt, 2006). Goals of HRD diverge signiﬁcantly in relation to the size of the company. While SME regard as highly important the motivation of the members of the organization, the promotion of technical competencies, and the upgrade of organizational and methodical competencies, large organizations markedly seek to strengthen social competences of their staff through instruments of HRD much more often than SME (see Table 2). Remarkably, regardless of the goals pursued by HRD, it fails to produce the desired results all the same. Apparently then, the various goals are met equally poor or equally well with the instruments used. Table 2.

Goals of Human Resource Development (HRD). 50–250 250–999 1,000þ Employees (%) Employees (%) Employees (%)

Staff motivation Updating technical expertise Promoting organizational and methodical competences Promoting social competences (r ¼ 0.323, po0.001) Investment in future talent

70.4 56.0 28.0

47.4 63.2 15.8

51.5 39.4 36.4

4.0

35.0

38.2

30.8

40.0

37.5

Question: What are the two most important goals of HRD in your company?

a ¼ 0.01.

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Table 3.

Ranking of HRD Instruments.

Training of new staff (w24 ¼ 12:965, po0.011, Cramer’s V ¼ 0.251) External further training On-the-job trainingþ (w24 ¼ 8:368, po0.079, Cramer’s V ¼ 0.202) Quality circle Horizontal and vertical job enrichment (w24 ¼ 7:509, po0.023, Cramer’s V ¼ 0.270) Job-rotation

50–250 Employees (%)

250–999 Employees (%)

1,000þ Employees (%)

86.7

58.3

53.1

46.6 53.3

16.7 65.0

26.5 59.2

0.0 10.0

8.3 8.3

10.2 30.6

3.3

16.7

12.2

Question: What are the two most important instruments of HRD for the construction of competencies in the company? a ¼ 0, 01; a ¼ 0.05; a ¼ 0.05.

Next the question was addressed whether enterprises will choose different means of HRD relative to enterprise size and whether they will ascribe different levels of importance to the different forms of HRD with regard to competency development in the company. Recent scientiﬁc debate has increasingly focused on forms of HRD closely related to working position such as job enlargement, job enrichment, or job rotation and their respective effects on competency development among staff members (Sonntag & Stegmaier, 2007). At the same time, however, off-the-job forms of further training must not be neglected. Since employees increasingly face the necessity for frequent job changes due to broader economic changes, particular signiﬁcance is given to the incorporation and training of new employees. First of all it needs to be pointed out that the forms of HRD, which vary relative to company size, are implemented to differing extents: Thus, the interviewed SME draw on off-the-job training more often than large-scale enterprises. Considering alternative instruments of HRD such as quality circles, horizontal and vertical job enrichment, job rotation, but also on-thejob training, however, SME act with more reserve than large-scale companies. SME acknowledge external training measures to be of outstanding relevance. Large companies by contrast prefer job enrichment for developing competencies internally. The ﬁndings as to the rankings (Table 3) can be found in the frequency of use of the HRD instruments, too (Table 4). At this point, the following might be noted as a preliminary conclusion: With regard to a company’s innovative capability the interviewed SME give

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Table 4. Frequency of Use of HRD Instruments. 50–250 Employees

250–999 Employees

1,000þ Employees

Training of new staffþ (F2;107 ¼ 2,540, po0.084)

M ¼ 3.5 SD ¼ 0.762

M ¼ 3.62 SD ¼ 0.637

M ¼ 3.8 SD ¼ 0.452

Associated a posteriori subgroupcomparison (post hoc-Scheffe´corresponding)

Cf. to 250–999 (po0.769) Cf. to W1000þ (po0.094)

Cf. to o249 (po0.769) Cf. to W1,000 (po0.451)

Cf. to o249þ (po0.094) Cf. to 250–999 (po0.451)

External further training

M ¼ 2.56 SD ¼ 0.669

M ¼ 2.50 SD ¼ 0.583

M ¼ 2.72 SD ¼ 0.784

On-the-job training (F2;105 ¼ 4.403, po0.015)

M ¼ 2.97 SD ¼ 1.062

M ¼ 3.31 SD ¼ 0.679

M ¼ 3.48 SD ¼ 0.544

Associated a posteriori subgroupcomparison (post hoc-Scheffe´corresponding)

Cf. to 250–999 (po0.247) Cf. to W1,000 (po0.015)

Cf. to o249 (po0.247) Cf. to W1,000 (po0.647)

Cf. o249 (po0.015) Cf. to 250–999 (po0.647)

Quality circle (F2;106 ¼ 4.487, po0.014)

M ¼ 1.52 SD ¼ 0.626

M ¼ 2.00 SD ¼ 0.938

M ¼ 2.00 SD ¼ 0.728

Associated a posteriori subgroupcomparison (post hoc-Scheffe´corresponding)

Cf. to 250–999þ Cf. to o249þ (po0.061) (po0.061) Cf. to W1,000 Cf. to W1,000 (po0.023) (po1.000)

Cf. to o249 (po0.023) Cf. to 250–999 (po1,000)

Horizontal and vertical job enrichment (F2;103 ¼ 9.581, po0.000)

M ¼ 1.82 SD ¼ 0.531

M ¼ 2.49 SD ¼ 0.674

Associated a posteriori subgroupcomparison (post hoc-Scheffe´corresponding)

Cf. to 250–999þ Cf. to o249þ (po0.092) (po0.092) Cf. to W1,000 Cf. to W1,000 (po0.000) (po0.211)

Cf. to o249 (po0.000) Cf. to 250–999 (po0.211)

Job-rotation (F2;107 ¼ 9.662, po0.000)

M ¼ 1.44 SD ¼ 0.619

M ¼ 2.04 SD ¼ 0.774

M ¼ 2,13 SD ¼ 0.733

Associated a posteriori subgroupcomparison (post hoc-Scheffe´corresponding)

Cf. to 250–999 (po0.008) Cf. to W1,000 (po0.001)

Cf. to o249 (po0.008) Cf. to W1,000 (po0.883)

Cf. to o249 (po0.026) Cf. to 250–999 (po0.883)

M ¼ 2.21 SD ¼ 0.710

Please quote, how often you use the instruments of HRD (never ¼ 0, if required ¼ 1, often ¼ 2, always ¼ 3); M, mean; SD, standard deviation. þ a ¼ 0.10, a ¼ 0.05, a ¼ 0.01.

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lesser importance to HRD than large-scale enterprises and instead concentrate on recruiting and selecting staff. Hence, and unsurprisingly so, they regard the training of new employees as the central HRD means to build up competencies in their companies. In addition, they consider external further training to be particularly appropriate. In the course of this, the motivation of employees by means of HRD activities is the pronounced aim. By contrast, the interviewed large-scale companies regard HRD as the central staff-related remit to ensure a company’s innovative capability. In comparison to SME, they highly appreciate job enrichment to build up competencies in their companies. Furthermore, they conspicuously pursue the aim of promoting social competencies. Now do the ﬁndings outlined so far make for the conclusion that self- and external organization will be performed differently relative to company size? The level of external organization is generally greater in respect of external training measures and the training of new staff than in the case of vertical and horizontal job enrichment. The latter is commonly tailored to the speciﬁc competencies of particular staff members, while the activities of the former allow for higher standardization. The implementation and the success of those HRD measures preferred by large companies are to a greater extent based on self-organization and self-organizational competency than are alternative measures.

4.2. Self- and External Organization The empirical study reveals that there is no signiﬁcant interdependence between self-organization of competency development and company size. In view of the wide distribution of results for self-organization (see Table 5), it is clear that SME tend toward the extremes rather more than large companies of over 1,000 employees. It is most likely that a very high or very low level of self-organization will be expected in a company of fewer than 1,000 employees. A medium level of self-organization is most readily expected in Table 5.

Index of Self-Organization in Relation to Company Size.

Low self-organization Medium self-organization High self-organization

50–250 Employees (%)

250–999 Employees (%)

1,000þ Employees (%)

12.5 50.0 37.5

18.8 50.0 31.3

7.1 75.0 17.9

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Table 6.

Managers as Coaches/Leaders of Human Resource Development (HRD).

Managers as coaches Managers not as coaches

50–250 Employees (%)

250–999 Employees (%)

1,000þ Employees (%)

56.5 43.5

70.0 30.0

94.7 5.3

companies of over 1,000 employees. The extent of expectations toward employees in the direction of a dissolution of boundaries of competency development as stated in Pongratz and VoX (2003) is therefore limited. The results of the empirical study on external organizations allow the following conclusions: While in 94.7% of large companies, managers are regarded as coaches and supported accordingly; this is much less frequently the case in SME. Only 56.5% of companies with 50–249 employees allocate the role of HRD coaches to their managers in any way, shape, or form. It is clear from these results that there is a striking divergence in the perception of managers’ roles from the viewpoint of experts in HRD in the largest and smallest companies (w2ð2Þ ¼ 13:036, po0.01, Cramer’s V ¼ 0.401) (see Table 6). In large enterprises, managers regard themselves more often as coaches/HR developers (Mann–Whitney U test, U79 ¼ 275, po0.000). It is worth noting in the discussion that managers of SME are often only given the task of checking the practical effect of competency development. Only in 44.4% of cases will SME managers be appraised according to whether they support their subordinates’ competency development, or be given managerial training to enable them to use HRD systems more competently. By contrast, in big companies this ﬁgure is 78.0% (w2ð2Þ ¼ 17:542 , po,000, Cramer’s V ¼ 0.417) and 84.1% (w2ð2Þ ¼ 8:273 , po0.016, Cramer’s V ¼ 0.305). Although there were few signiﬁcant differences between SME and large companies in terms of their expectations toward their employees’ pursuit of self-organization, external organization of competency development is conducted in a different manner in SME and large companies, respectively. In this respect, it should be noted that less effort is made by SME to implement external organization of competency development than by large companies. This insight raises the question which forms and degree of selforganization ‘‘ﬁts’’ to which form of external organization, depending on the involvement of management. Based on the ﬁndings regarding self- and external organization, it was examined that combinations of the two forms are favored by large

Self-Organization of Competency Development and the Role of Managers

Table 7.

253

Combination of Self-Organization and External Organization in Different-Sized Companies.

Size of the Company

50–249 Employees (SMEs) (Valid Data ¼ 20)

250–999 Employees (Valid Data ¼ 15)

Over 1,000 Employees (Valid Data ¼ 26)

Managers Managers Managers Managers Managers Managers not as as not as as not as as Coaches Coaches Coaches Coaches Coaches Coaches (%) (%) (%) (%) (%) (%) Low self-organization Medium selforganization High self-organization

5.0 10.0

10.0 35.0

0 13.3

20.0 40.0

0 7.7

7.7 73.1

30.0

10.0

6.7

20.0

0

11.5

companies and SME, respectively, and whether there are different patterns. It was found that, in regarding the interplay between external and self-organization in SME and large companies, different combinations are discernible. Of the interviewed large companies of more than 1,000 employees, over 70% displayed the following combination: A moderate level of self-organization is demanded of the employees while the executive managers are expected to view themselves as leaders/coaches of HRD (see Table 7). In SME, such a clear preference for one combination of selfand external organization could not be detected. Here a greater range of variation without any clear pattern appears. It might be examined in a further study whether the two characteristics (1) ‘‘high self-organization’’ and (2) ‘‘executives do not act as coaches’’ correspond (as is the case with 30% of SME). At any rate, this combination carries a high risk of undesirable results of competency development from the companies’ perspective.

4.3. Inﬂuencing Factors and Requirements of Successful Competency Development Fifty nine, 5% of the large businesses, as well as 64, 3% of the SME complain that competency development does not lead to the desired results. The need to improve competency development is therefore independent of the size of the company. How this problem is dealt with and how HRD is managed, however, does depend decisively on the size of the company. Against this

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ﬁnding, it could be argued that for its veriﬁcation an objective measurement of competences would have to be conducted at different points in time. First of all it should be noted here that an exact measurement of changes in competency brought about by HRD activities is rather difﬁcult, due to the heterogeneity of target groups and their different learning preconditions as well as to the different measures taken in HRD such as job enlargement, job enrichment, job rotation, or road shows. Moreover, even if such measurement could be carried out accurately, still the fact would be neglected that HRD activities do not solely aim at changing competences but also at motivating the employees (by the use of HRD instruments) or at investing in the junior staff (by dint of appropriate measures). From the perspective laid out in this paper, a more viable insight can be drawn from addressing the question how the responsible HRD experts in enterprises interpret those occurrences and coherences that are relevant for competency development. It is assumed that the particular interpretation determines the subsequent action. Approaches that advocate an increased self-organization of competency development give the impression of the desired goals becoming more readily achievable. This thesis, however, could not positively be proven in this study. The majority of companies which do not claim that competency development does not bring the desired result require of their personnel low or medium self-organization. Hence these companies do not take a high risk as for internal competency development. At the same time, the empirical study suggests the following assumption: The higher the expectation toward self-organization, the more often competency development does not lead to the desired outcome (Mann–Whitney U test: U64 ¼ 344, po0.028) (w22 ¼ 5:760þ , po0.056, Cramer’s V ¼ 0.300) (see Table 8). This result might be explained as follows: With regard to competency development, staff members have only limited self-organizational competency, and therefore fail to meet expectations toward such self-organization when those are too high. Another explanation might be that a high level Table 8.

Index of Self-Organization and the Results of Competency Development.

Low self-organization Medium self-organization High self-organization

Competency Development does not Lead to the Desired Outcome (%)

Competency Development Leads to the Desired Outcome (%)

10.0 55.0 35.0

16.7 75.0 8.3

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Table 9.

255

Managers as Coaches and the Success of Competency Development.

Managers as coaches Managers not as coaches

Competency Development does not Lead to the Desired Outcome

Competency Development Leads to the Desired Outcome

38.9 61.1

41.1 58.9

of self-organization might lead to fear on the side of the management, of employees predominantly pursuing personal aims and regarding the company’s aims as being of secondary importance. Scientiﬁc research on the role of managers (Friebe, 2005) comes to the conclusion that competency development will more readily produce the desired effects when managers are assigned the role of HRD leader. Surprisingly, this thesis could not be veriﬁed by the present study (see Table 9). In view of this paper’s central question, the following points must be stressed: There is a signiﬁcant correlation between (a) the index of selforganization and (b) the item ‘‘Competency development leads to the desired outcome’’ as well as a correlation between (c) company size and (d) the expectation toward managers to see themselves as HRD leader. At the same time, however, a correlation between (a) the index of selforganization and (c) company size could not be shown; nor could be found evidence for a correlation between (d) the demand of managers to perform HRD-related tasks and (b) the item ‘‘Competency development leads to the desired outcome.’’ This result suggests the conclusion that expecting managers to increasingly perform HRD activities does not sufﬁce to ensure competency development will produce the desired effects. An explanation might be that managers have yet to meet the expectations directed at them as for HRD efforts. Such interpretation is also conﬁrmed by the ﬁndings of the study by Seufert and Euler (2008), which involved 90 experts responsible for staff matters in their companies. The study concluded, that the interviewed experts saw the issue of managers-as-HRD leaders as highly important, yet tended to assess the level of realization as relatively moderate. The empirical study did not however test for the degree to which managers act in accordance with these expectations. At ﬁrst glance, this result is inconsistent with the ﬁndings of Friebe (2005), according to whose employee survey learning-oriented leadership positively affects staff’s occupational competency development. However, the aim of this empirical study was not to explore to what extent managers’ behavior

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supports their staff’s training from the perspective of the staff; the aim was rather to ascertain from the perspective of the experts in the companies what was expected of managers with regard to their role as coaches and to what extent this form of external organization is supported by the companies. At the same time, it becomes apparent that employee attitude surveys such as that by Friebe (2005) and interviews with experts, as in the case of this study, relating to the dimensions of learning culture and their inﬂuence on competency development can lead to different ﬁndings. In consulting employees, one should bear in mind that a substantial number of employees are unwilling to participate in training programs, which is also expressed in their training behavior. According to a study of Bolder, Hendrich, Nowak, and Reimer (1994, p. 27), in which 1,529 employed or employment-oriented people in Germany participated, over 40% of the 18- to 60-year-old employees had never undertaken occupational training. However, Friebe (2005) does not categorize the staff according to whether or not they participate in further training – it is possible that a large proportion of the staff interviewed by Friebe have no experience in further training. It should also be considered that when executive manager adopt the role of leader/coach of HRD, this can have differing effects on various phases of competency development. While the involvement of the executive manager during the transfer phase has a positive impact (cf. Rouillier & Goldstein, 1993; Tracey et al., 1995), involvement in the periods of demand analysis and the selection of competency development methods may produce undesired effects. For instance, executives might misjudge their employees’ potentials, or they may not choose the appropriate competency development measures. Moreover, it is crucial whether managers display competencies to fulﬁll afore-mentioned tasks, and if so, of which particular type those competencies are.

5. SUMMARYAND CONCLUSION In terms of the opening hypotheses, the ﬁndings can be summarized as follows: (1) The empirical study comes to the conclusion that large enterprises emphasize the central role of HR development for the innovation capacity of an organization more than SME. The ﬁrst hypothesis could not be falsiﬁed. (2) The thesis, that large companies expect of their members a higher degree of self-organization of competency development than SME do, could not be veriﬁed. (3) The same applies to the thesis, that the more pronouncedly the demands for self-organization, the sooner will competency development produce the desired result. Rather, the empirical study suggests that at a

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certain degree of expected self-organization, a signiﬁcant correlation emerges that in fact works in the opposite direction. (4) On the other hand, the study does corroborate the assumption that the bigger the company, the sooner managers are expected to act as HRD coaches. (5) At the same time, proof could not be found for the assumption that the more pronounced the expectation toward managers to perform HRD-related functions, the higher the probability of competency development producing the desired result. (6) Furthermore, only in the interviewed large companies a preference for a speciﬁc combination of self- and external organization was discernible. That did not hold true for the interviewed SME. (7) The results obtained by the empirical study do not sufﬁce to make a deﬁnite statement on whether certain combinations of self- and external organization more readily entail a competency development that produces the desired outcome. To clarify that particular point, further research is necessary. The conditions and constraints of HRD differ from SMEs to large companies. If an organization wants to achieve its aims of HRD, these differences must be considered by the persons responsible for the organization of external and internal learning. In solving the problem of why competency development does not lead to the desired results, both employees and managers play a key role. A company’s support of its employees’ learning cannot simply be reduced to managers passively granting employees the freedom to undertaking their own learning. It is much more effective for managers to play an active part in all the processes involved in competency development. Managers should for instance know how to shape working conditions so that they can function as learning opportunities. For this they require a minimum level of didactical competency. However, it is worth bearing in mind that micro-management of employees would defeat the object of self-organization. What is necessary is an interplay of self- and external organization with the different forms and activities going well together and, in the sense of an iterative process, interlink and interlock. The results obtained do not shed clear light on the question as to the impact of managers acting as coaches. It is for this reason that a differentiated examination of the issue is a top priority. In this process, it should be studied whether external organization is geared toward setting guidelines or, rather, aims at enabling a dialogue between the affected and involved parties. Holcomb, Holmes, and Connelly (2009) have attached importance to managerial abilities with regard to the generation of competitive advantages. They mentioned that ‘‘managers are an important source of value creation’’ and emphasized the fact that ‘‘managers and resources jointly determine ﬁrm success.’’

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The following questions demand clariﬁcation: What are managers’ own conceptions of their role as coach/leader of HRD? Are there different forms of role perception? Can various types of managers be differentiated? To what extent do executives stick to their roles as coaches of HRD, especially when informal and incidental learning in the company (Marsick & Watkins, 2001) must be enhanced? To what extent is this role compatible with other roles? Clearly, managers simultaneously fulﬁll other roles, for example, as efﬁciency and change managers or coordinators of teams (Kleinau, 2005). To live up to their role (see also Mintzberg’s conceptional consideration), actors at medium management level are asked to take into account differing expectations by various stakeholders. Failing to fulﬁll all those expectations at the same time, they are presented with the challenge of having to prioritize some expectations over others, that is, they have to answer the question ‘‘who or what really counts.’’ Decisive for their strategy of action is, whether actors see the stakeholders’ expectations as a scope for design or as a threat and constraint (Crilly & Sloan, 2008). The differing expectations lead to conﬂicts, such as intra-sender conﬂicts and inter-sender conﬂicts, role conﬂicts, role ambiguity, and role overload (Wunderer, 2003). How managers deal with these conﬂicts is a decisive indicator as to how well they do justice to their new function as coach of HRD. Of great value would be an explicit survey of managers. Further research is needed into the relationship between self- and external organization. Central questions include: Do employees even want executives to meddle in their competency development? And if so, how do they feel executives should go about it? How can the interaction between selforganization and external organization be structured through clariﬁcation and deﬁnition of the participants’ role perception? When do deﬁcits in the co-ordination between self- and external organization lead to unsuccessful competency development? To what extent does the company-speciﬁc learning culture inﬂuence the interplay between self- and external organization? Acknowledging the fact that competency development is critical for a company’s innovative ability, while roughly 60% of such activities indeed fail to produce the desired outcome, the questions raised here are indisputably pressing.

NOTE 1. In this discussion, the standard terminology of the competence-based management perspective is used, so that an individual has a ‘‘competency’’ or ‘‘competencies’’ while an organization has a ‘‘competence’’ or ‘‘competences.’’

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